Calculate the expected return and the standard deviation

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Reference no: EM131852614

Corporate bonds are rated based on their likelihood of default. Instead of investing in just one low grade, you want to examine the effect on the expected return and variance of forming a portfolio of investment grade (e.g., AAA) and non-investment grade bonds. The probability of default in a year for the investment grade is 0.01 (1%) while the probability for the lower grade bonds is 0.22 (or 22%). The correlation between the default rates is 0.1. Calculate the expected return and the standard deviation of investing 50% of your portfolio in investment grade bonds and the other 50% in non-investment grade bonds. The variance are 0.0099 and 0.1716.

Reference no: EM131852614

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