Jhawk Posts: 2, Reputation: 1 New Member #1 Dec 20, 2006, 07:29 PM
Corporate Finance
Any help on solutions to these problems by 3pm EST 12/21/06?

Security F has an expected return of 12 percent and a standard deviation of 9 percent per year. Security G has an expected return of 18 percent and a standard deviation of 25 percent per year.

What is the expected return on a portfolio composed of 30 percent of security F and 70 percent of security G?

If the correlation between the returns of security F and security G is 0.2, what is the standard deviation of the portfolio described in part (a)?
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There are three securities in the market. The following chart shows their possible payoffs.
State Probability of Outcome
Return on Security 1 (%) Return on Security 2 (%) Return on Security 3 (%

1) 0.1 0.25 0.25 0.10

2) 0.4 0.20 0.15 0.15

3) 0.4 0.15 0.20 0.20

4) 0.1 0.10 0.10 0.25

What is the expected return and standard deviation of each security?
What are the covariances and correlations between the pairs of securities?
What is the expected return and standard deviation of a portfolio with half of its funds invested in security 1 and half in security 2?
What is the expected return and standard deviation of a portfolio with half of its funds invested in security 1 and half in security 3?
What is the expected return and standard deviation of a portfolio with half of its funds invested in security 2 and half in security 3?
 ake_finance Posts: 19, Reputation: 1 New Member #2 Dec 21, 2006, 11:45 PM
Variance of Portfolio is = (0.3^2*0.09^2)+(0.7^2*0.25^2)+2(0.3)(0.7)(0.2)(0.0 9)(0.25)
= 0.000729 + 0.030625 + 0.00189
= 0.033244

We've got the variance and then we can caculate the Standard Deviation of Portfolio by caculating the square root of variance, so the answer is = 0.182329
 ake_finance Posts: 19, Reputation: 1 New Member #3 Dec 21, 2006, 11:47 PM
This is the answer for the question
Variance of Portfolio is = (0.3^2*0.09^2)+(0.7^2*0.25^2)+2(0.3)(0.7)(0.2)(0.0 9)(0.25)
= 0.000729 + 0.030625 + 0.00189
= 0.033244

We've got the variance and then we can calculate the Standard Deviation of Portfolio by calculating the square root of variance, so the answer is = 0.182329

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