You are considering investing in two securities, X and Y. The following data are available for the two securities:
|
|
Security X
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Security Y
|
|
Expected Return
|
0.10
|
0.07
|
|
Standard Deviation of returns
|
0.08
|
0.04
|
|
Beta
|
1.10
|
0.75
|
a. If you invest 40 percent of your funds in Security X and 60 percent in Security Y and if the correlation of returns between X and Y is +0.5, compute the following: i. The expected return from the portfolio ii. The standard deviation of returns from the portfolio.
b. What happens to the expected return and standard deviation of returns of the portfolio in Part a if 70 percent of your funds are invested in Security X and 30 percent of your funds are invested in Security Y?
c. What happens to the expected return and standard deviation of returns of the portfolio in Part a if the following conditions exist?
i. The correlation of returns between Securities X and Y is +1.0.
ii. The correlation of returns between Securities X and Y is 0.
iii. The correlation of returns between Securities X and Y is -0.7.