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Computing of expected return on portfolio
Suppose you own a portfolio of T-Bills and two stocks: Motorola and Nokia. The share of the portfolio invested in T-Bills is worth $20,000, while the share invested in Motorola is worth $30,000. The rest of the portfolio is invested in 600 shares of Nokia. Suppose the following is known: A share of Nokia trades currently for $120. Shares of Nokia have an average return of 15% and a volatility of 21%. Shares of Motorola have an average return of 12% and a volatility of 23%. The correlation between the two stocks is -0.1. Suppose that, in addition, T-Bills have an average return of 4% while the market index has an average return 17% and a volatility of 20%.
Question:
If you are to reinvest your money into a new portfolio with the same volatility as your current portfolio, what is the best expected return you could hope for?
a. 10.46%
b. 15.42%
c. 12.51%
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