An investor owns a portfolio consisting of two mutual funds

An investor owns a portfolio consisting of two mutual funds, A and B, with 40% invested in A. The following table lists the inputs for these funds.

Calculate the expected value of the portfolio return. (Round your answer to 2 decimal places.)

Calculate the standard deviation of the portfolio return. (Round your intermediate calculations to 4 decimal places and final answer to 2 decimal places.)

Solution

An investor owns a portfolio consisting of two mutual funds, A and B, with 40% invested in A. The following table lists the inputs for these funds.

Measures

Fund A

Fund B

  Expected value

12     

7     

  Variance

98     

44     

  Covariance

33

a.

Calculate the expected value of the portfolio return. (Round your answer to 2 decimal places.)

  Proportion of fund A =0.4

Proportion of fund B =1-0.4 =0.6

  Expected value = 0.4*12+0.6*7 = 9.00

b.

Calculate the standard deviation of the portfolio return. (Round your intermediate calculations to 4 decimal places and final answer to 2 decimal places.)

Portfolio Variance = w²_A*?²(R_A) + w²_B*?²(R_B) + 2*(w_A)*(w_B)*Cov(R_A, R_B)

Variance = 0.4^2*98+0.6^2*44 +2*0.4*0.6*33 = 47.36

standard deviation of the portfolio return = sqrt(47.36) =6.88