A portfolio has 38 percent of its funds invested in Security C and 62 percent invested in Security D.Security C has an expected return of 8.47 percent and a standard deviation of 7.12 percent.Security D has an expected return of 13.45 percent and a standard deviation of 16.22 percent.The securities have a coefficient of correlation of .89.What are the portfolio rate of return and variance values?
A)11.09 percent ; .124031
B)11.56 percent ; .127620
C)11.56 percent ; .015688
D)10.87 percent ; .014308
E)10.87 percent; .127620

Question

Quizplus · Accepted Answer

The portfolio rate of return can be calculated as a weighted average of the returns of the individual securities, which is (0.38 * 8.47) + (0.62 * 13.45) = 11.56 percent. The variance of the portfolio can be calculated using the formula for the variance of a two-asset portfolio, which takes into account the weights of the assets, their variances, and their covariance (derived from the correlation coefficient). The correct variance calculation results in .015688.

A Portfolio Has 38 Percent of Its Funds Invested in Security