Assume there is a fixed exchange rate between the Canadian and U.S.dollar.The expected return and standard deviation of return on the U.S.stock market are 13% and 15% respectively.The expected return and standard deviation of return on the Canadian stock market are 12% and 16% respectively.The covariance of returns between the U.S.and Canadian stock markets is 1.2%.If you invested 50% of your money in the Canadian stock market and 50% in the U.S.stock market,the expected return on your portfolio would be __________.

Question

Quizplus · Accepted Answer

To calculate the expected return on the portfolio, we need to use the formula:

Expected return = weight of investment 1 * expected return of investment 1 + weight of investment 2 * expected return of investment 2

Here, investment 1 is the Canadian stock market and investment 2 is the U.S. stock market. The weights are each 50%.

Expected return on portfolio = 0.5 * 12% + 0.5 * 13% = 12.5%

Therefore, the answer is B) 12.5%.

Assume There Is a Fixed Exchange Rate Between the Canadian