Question
The following information is available about a portfolio: Asset (A) Asset (B) E(R A ) = 15% E(R B ) = 12% (s A )
The following information is available about a portfolio:
| Asset (A) | Asset (B) |
|
| E(RA) = 15% | E(RB) = 12% |
|
| (sA) = 14% | (sB) = 9.0% | Standard deviation |
| Investment: $2.5 million | $7.5 million |
|
| Correlation A,B = 0.70 |
| |
a. A portfolio is invested in asset A and B with the initial the amounts above. What is the portfolio expected return and standard deviation?
b. Should the investor consider replacing asset A with a new asset C. Asset C has an expected rate of return of 16%, but has a higher risk, a standard deviation of 20% and zero correlation with asset B. Explain you answer numerically.
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