Question
Calculate the expected return and standard deviation of a 3-asset portfolio which is comprised of 50% Large Cap Stocks, 30% Small Cap Stocks, and 20%
Calculate the expected return and standard deviation of a 3-asset portfolio which is comprised of 50% Large Cap Stocks, 30% Small Cap Stocks, and 20% Corporate Bonds. Use the formula found in the Powerpoint slides from Chapter 11, slide 11-30 for a 3-asset portfolio. Do not use the formula in our textbook on page 379 since it is only if all the correlations are zero, which is not what is the case in this question. Show your work. Use this data:
The expected return on Large Cap Stocks is 12% with a standard deviation of 20%.
The expected return on Small Cap Stocks is 17% with a standard deviation of 33%.
The expected return on Corporate Bonds is 6% with a standard deviation of 8%.
The correlation between Large Cap stocks and Small Cap Stocks is 0.79.
The correlation between Large Cap stocks and corporate bonds is 0.17.
The correlation between Small Cap stocks and corporate bonds is 0.07.
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