You have $400,000 invested in a well-diversified portfolio.

You inherit a house that is presently worth $200,000.

Consider the summary measures in the following table:

The correlation coefficient between your portfolio and the house is 0.38.

a. What is the expected return and standard deviation o f your portfolio comprising your old portfolio and the house?

b. Suppose you decide to sell the house and use the proceeds o f $200,000 to buy risk-free T-bills that promise a 3% rate of return. Calculate the expected return and standard deviation of the resulting portfolio. L05

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Investment Old portfolio House Expected Return Standard deviation 6% 8% 16% 20%