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9 May, 08:34

You invest 60% of your financial assets in Standard & Poor's Depository Receipts with an expected return of 10% and a standard deviation of 20% and 40% of your financial assets in MSCI EAFE Index Fund with an expected return of 12% and a standard deviation of 30%. The correlation between the two investments is 35%. What are the expected return and the standard deviation of your portfolio?

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  1. 9 May, 10:46
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    Expected Return = 10.80%

    Standard Deviation = 19.72%

    Explanation:

    Amount invested in Standard & Poor's Depository Receipts = 60%

    Expected return of Standard & Poor's Depository Receipts = 10%

    standard deviation of Standard & Poor's Depository Receipts = 20%

    Amount invested in MSCI EAFE Index Fund = 40%

    Expected return of MSCI EAFE Index Fund = 12%

    Standard deviation of MSCI EAFE Index Fund = 30%

    Correlation between the two investments = 35%

    Now,

    Expected Return = ∑ (Amount invested * Expected rate of return)

    = 0.60 * 0.10 + 0.40 * 0.12

    or

    = 10.80%

    Standard Deviation = √ (∑ (Amount invested * Standard deviation)) ²

    = √[ (0.60) ² (0.20) ² + (0.40) ² (0.30) ² + 2 (0.60) (0.40) (0.20) (030) (0.35) ]

    or

    Standard Deviation = 19.72%
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