Question
An investor is considering an investment and has been provided the following information by the broker in respect to these three securities. A B C
An investor is considering an investment and has been provided the following information by the broker in respect to these three securities.
A
B
C
Expected return
16
18
15
Standard deviation
12
14
13
The correlation coefficient between security A and B=0.7, security B and C=0.4, security A and C=0.5. Assume that the investor will construct one of the following portfolios with the following characteristics:
Portfolio X consist of 60% investment in security A and 40% investment in security B
Portfolio Y consist of 40% investment in security A, 35% investment in security B and 25% investment in security C.
Required
a)
Calculate the expected return of each portfolio
(4 marks)
b)
Compute the covariance between the returns of various possible combinations
of the securities
(6 marks)
c)
Determine the standard deviation of each portfolio
(6 marks)
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