What is the expected return of the portfolio?

portfolio

#1

Answer:

Expected return on portfolio = XaE(Ra) + XbE(Rb)

where Xa is the percentage of the portfolio in A, and Xb is the the percentage of the portfolio in B
Xa = .75, Xb = .25

Expected return on portfolio = .75*.10 + .25*.12
= .105 or 10.5%(A)

Standard deviation of portfolio = (Variance of portfolio)^.5
Variance of portfolio = Xa^2(stnd deviation of Xa)^2 + Xb^2(stnd deviation of Xb)^2 + 2XaXbcovariance (Ra,Rb)

= (.75)^2*.06 + (.25)^2*.019 + 2(.75)(.25)*.0120
= .03375 + .0011875 +.0045
= .0394375

Standard deviation of portfolio = (.0394375)^.5
= .1986 or 19.86% (B)