Portfolio X is a $5 million equity portfolio with an expected return of 10% and standard deviation of 24%. The manager of Portfolio X has just received an additional $5 million which he will invest in one of the three equity portfolios: A, B, or C, thereby increasing the size of the portfolio to $10 million. The expected returns and standard deviations of returns for Portfolios A, B and C as well as their correlation coefficients with Portfolio X are reported below.

Portfolio A B C Expected return 12% 16% 22% Standard deviation 28% 36% 42% Correlation coefficient with Portfolio X 0.90 0.90 0.12

a. Compute the expected return and standard deviation of return for each of the resulting $10 million portfolios (Portfolio XA, Portfolio XB and Portfolio XC).

b. What three factors (variables) determine the risk of a portfolio?