Question
(a) ThestandarddeviationsofreturnsonassetsAandBare15percentand 21 percent respectively. A portfolio is constructed consisting of one-third of the funds in asset A and remainder in asset B. Calculate the
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(a) ThestandarddeviationsofreturnsonassetsAandBare15percentand 21 percent respectively. A portfolio is constructed consisting of one-third of the funds in asset A and remainder in asset B. Calculate the portfolio standard deviation if the correlation of returns between the two assets is: (i) +0.5 (ii) 0 (iii) +1.0
Comment on your answers.
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(b) If an investment with a beta of 0.8 offers an expected return of 10%, should you proceed with the investment? Determine where will this investment plot in relation to the security market line? Assume that the government bond rate is 4.5%, and the market risk premium is 13.5%. Show your working clearly. Interpret your answer.
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