# Calculation Of Expected Return And Variance For Securities

Question

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 A 0.17 0.0169 1.0 0.4 0.7 0.2 B 0.13 0.0361 1.0 0.6 0.5 C 0.09 0.0049 1.0 0.9 D 0.07 0.0050 1.0

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?

• An equally-weighted portfolio of securities A, B, and C.
• An equally-weighted portfolio of A, B, and D.
• An equally-weighted portfolio of B, C, and D.

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?

Summary

The question belongs to Finance and it discusses about expected returns and variance of a portfolio which contains 4 securities. These have been calculated and presented in the solution.

Total Word Count 163

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