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Problem ST.1 (Portfolio Expected Return and Risk) Sam Wicks is a 58-year-old father of four who plans to retire sometime during the next 10 years.
Problem ST.1 (Portfolio Expected Return and Risk) Sam Wicks is a 58-year-old father of four who plans to retire sometime during the next 10 years. To this point in his working career he has invested his entire 401(k) retirement fund in a small cap mutual fund that has an expected rate of return of 14% and a standard deviation (risk) of 30%. Given his ap- proaching retirement Sam is thinking about altering his investment portfolio to include 50% invested in the small cap fund and the remaining 50% in a balanced fund (a fund that places approximately half its investments in stock and the other half in bonds). The balanced fund has a lower expected rate of return of only 8% but has a much lower standard deviation of only 15%. Sam's investment advisor sug- gested that the two funds tend to move together in response to changes in the level of the stock mar- ket but are not perfectly correlated. Sam estimates that for his purposes he will use .60 as the correlation coefficient between the two funds. If Sam moves half his 401k funds into the balanced fund and leaves the remainder in the small cap fund, what would his expected portfolio return and standard deviation in portfolio return be for the combined portfolio
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