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Jessie Yeo originally has a $800,000 fully-diversified portfolio. She subsequently inherits her father's portfolio of AjaxFunds worth $100,000. Her financial adviser provided her with the
Jessie Yeo originally has a $800,000 fully-diversified portfolio. She subsequently inherits her father's portfolio of AjaxFunds worth $100,000. Her financial adviser provided her with the following forecast information in Table 1. The correlation coefficient of AjaxFunds with the original portfolio returns is 0.26. Jessie is considering whether to keep or to sell the inheritance. Assuming that Jessie keeps AjaxFunds, calculate: (a) The expected return of her new portfolio, which now includes AjaxFunds; (10 marks) (b) The covariance of AjaxFunds returns with the original portfolio returns; (5 marks) (c) The standard deviation of her new portfolio, which includes AjaxFunds. (5 marks) Table 1: Risk and Return Characteristics Expected Return Jessie's Original Portfolio 6.2% AjaxFunds 4% Standard Deviation 3.4% 2.8%
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