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Problem:
The expected returns, return variances, and the correlation between the returns of four securities are shown below.
Security
Expected Return
Variance of Returns
Correlation
A
B
C
D
0.17
0.0169
1.0
0.4
0.7
0.2
0.13
0.0361
0.6
0.5
0.09
0.0049
0.9
0.07
0.0050
a. Determine the expected return and variance for a portfolio composed of 25% of security A and 75% of security B.
b. Determine the expected return and variance of a portfolio that contains 78% security A and 22% security B. Is this portfolio superior to that one in (a) above?
c. Calculate the expected return and variance of a portfolio that contains 60% security C and 40% security D.
d. If an investor were to select among the following three portfolios, which one would he or she prefer?
e. If a risk-adverse investor desires to hold a portfolio of only two securities and expects a return of 11%, what would you advise the investor to do?
Additional Information:
This question basically belongs to Finance as well as it describes about expected returns and variance of a portfolio which haves 4 securities. These have been computed and presented in the solution.
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