Expected returns and portfolio variance:
You are considering investing in two securities, X and Y. The following data are available for the two securities:
|
|
Security X
|
Security Y
|
|
Expected Return
|
0.10
|
0.07
|
|
Standard deviation of returns
|
0.08
|
0.04
|
|
Beta
|
1.10
|
0.75
|
A. 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?
B. 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.