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What are the expected return and standard deviations

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Reference no: EM132908434

Consider the case of 2 risky assets. Asset 1 has an expected return of 9.00% and a standard deviation of 20.00%. Asset 2 has an expected return of 5.00% and a standard deviation of 7.00%. The correlation coefficient for the two assets is 0.30. The return on the risk-free asset is 0.25%.

1. What are the expected return and standard deviations of the following portfolios?

a. 80% stocks, 20% bonds

b. 60% stocks, 40% bonds

c. 40% stocks, 60% bonds

d. 20% stocks, 80% bonds

2. What are the expected return and standard deviation from allocating our wealth 20% to the risk-free asset and 80% to the (40,60) (stock,bond) portfolio?

3. What is the slope of the line formed by all possible combinations of the risk-free asset and the (40,60) portfolio?

4. What portfolio (selected from all the possible combinations of stocks and bonds) forms the best possible Capital Allocation Line? The correct answer will define the portfolio according to the weights, e.g. (w1,w2) = (50,50).

5. What is the slope of the Capital Market Line (CML)?

6. What are the expected return and standard deviation of a portfolio that invests -25% in the risk-free asset and the remainder of the portfolio in the optimal portfolio found in Step #4?

Reference no: EM132908434

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