Question
In a particular market, the following assumptions apply: Possibilities Probability of outcome Market returns Yield on securities 1 Yield on securities 2 1 10% 5%
In a particular market, the following assumptions apply:
Possibilities | Probability of outcome | Market returns | Yield on securities 1 | Yield on securities 2 |
1 | 10% | 5% | 14% | 10% |
2 | 30% | 7% | 15% | 8% |
3 | 50% | 10% | 16% | 6% |
4 | 10% | 20% | 23% | 3% |
a) What is the expected return and standard deviation of each security?
b) What is the covariance between the market and securities 1 and 2?
c) What is the correlation between the market and securities 1 and 2?
d) What is the expected return and standard deviation of a portfolio that has 50% of holdings in securities 1 and 50% in securities 2?
e) What is the expected return and standard deviation of a portfolio that has 10% holdings in securities 1 and 90% in securities 2?
f) What is the expected return and standard deviation of a portfolio that has 90% holdings in securities 1 and 10% in securities 2?
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