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Assume that a company has an existing portfolio A with an expected return of 9 percent and a standard deviation of 3 percent. The company

Assume that a company has an existing portfolio A with an expected return of 9 percent and a standard deviation of 3 percent. The company is considering adding an asset B to its portfolio. Asset Bs expected return is 12 percent with a standard deviation of 4 percent. Also assume that the amount invested in A is $700,000 and the amount to be invested in B is $200,000. If the degree of correlation between returns from portfolio A and project B is zero.

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PROBLEM 7-6 Effect on Risk of Adding a New Asset to a Portfolio Given: Expected Return of existing portfolio A Standard deviation of existing portfolio A 9.00% 3.00% Expected Return of new asset E Standard deviation of new asset B 12.00% 4.00% Amount invested in Portfolio A$700,000 Amount to be invested in Asset B$200,000 Correlation coefficient r between existing portfolio A and new asset B reliminary calculations: Coefficient of variation of existing portfolio A: Coefficient of variation of new asset B Total value of new combined portfolio Weight of existing assets in combined portfolio Weight of new asset B in combined portfolio Expected Return of combined portfolio per equation 7-1 a. Comparison of standard deviations of existing and new combined portfolios: Standard deviation of new combined portfolio per equation 7-5 Standard deviation of existing portfolio A (given) 3.00% b. Comparison of coefficients of variation of existing and new combined portfolios: Coefficient of Variation of new combined portfolio Coefficient of Variation of existing portfolio A 0.00%

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