Assignment:
You have $400,000 invested in a well-diversified portfolio. You inherit a house that is presently worth $200,000. Consider the summary measures in the following table:
| Investment |
Expected Returns |
Standard Deviations |
| Old Portfolio |
6% |
16% |
| House |
8% |
20% |
The correlation coefficient between your portfolio and the house is 0.38.
a. What is the expected return and standard deviation of your portfolio comprising your old portfolio and the house?
b. Suppose you decide to sell the house and use the proceeds of $200,000 to buy risk-free T-bills that promise a 3% rate of return. Calculate the expected return and standard deviation of the resulting portfolio.
Provide complete and step by step solution for the question and show calculations and use formulas.