A foreign bond has a return labelled rlowast with mean 2, Applied Statistics

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A foreign bond has a return labelled rlowast with mean 2

Suppose that the return, labelled r, on a domestic bond can take on the followingvalues, with these probabilities:

r: 2, 3, 4

Prob: 0.4, 0.3, 0.3

(a) Find the expected value or mean (μr) and variance (σ2r ) of r.

(b) A foreign bond has a return, labelled r∗, with mean 2 and variance 2. The covariancebetween the two returns, r and r∗, is 1. Suppose investors hold 75% of their portfolios in the domestic bond and 25% in the foreign bond. Find the expected value (mean) and variance of the portfolio return.

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Applied Statistics: A foreign bond has a return labelled rlowast with mean 2

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Applied Statistics: A foreign bond has a return labelled rlowast with mean 2

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