Consider combining investments in three stock markets to create a portfolio. The US S&P has an expected return of 11.0% and a standard deviation of 10.1%. The Sensex in India has an expected return of 11.5% and standard deviation of 13.5%. The DAX in Germany has an expected return of 12.2% and standard deviation of 15.1%. Correlations of the three investments are summarized below:
Correlation between the S&P and Sensex = .55
Correlation between the S&P and the DAX = .68
Correlation between the Sensex and DAX = .48
a) Calculate the average return, the variance, and the standard deviation of a portfolio that consists of 40% of S&P, 25% Sensex, and 35% DAX (Portfolio A).
b) Calculate the expected return, the variance, and standard deviation of a portfolio that consists of 20% of S&P, 30% Sensex, and 50% DAX (Portfolio B).
c) Would an investor prefer portfolio A or B? Discuss why.