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Suppose there are only two stock markets in the world: the U.S. stock market and the emerging countries stock market. The expected returns on the
Suppose there are only two stock markets in the world: the U.S. stock market and the emerging countries stock market. The expected returns on the markets are 7% and 15%, while the standard deviations are 16% and 25%, respectively. The covariance between the two markets is 0.0075. Suppose you want your portfolio to earn an average/expected return of 10%. What fraction of your investment should be in each market? What would be the volatility of your portfolio?
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