(a) Mr Adani invests in two risky securities with the following details: Security 1: r1=0.16; 01-0.30; Security 2: r2=0.08; 2=0.25 Where r1 is the expected return of security 1 and o1 is the standard deviation of returns of security 1; r2 is the expected return of security 2 and o2is the standard deviation of returns of security 2 The correlation coefficient (p12) between the returns of the two securities is -0.5 (i) Calculate the expected rate of return(r) and risk(o) for the following portfolios:
(a) Mr Adani invests in two risky securities with the following details: Security 1: r1=0.16; 01-0.30; Security 2: r2=0.08; 2=0.25 Where r1 is the expected return of security 1 and o1 is the standard deviation of returns of security 1; r2 is the expected return of security 2 and o2is the standard deviation of returns of security 2 The correlation coefficient (p12) between the returns of the two securities is -0.5 (i) Calculate the expected rate of return(r) and risk(o) for the following portfolios:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:(a) Mr Adani invests in two risky securities with the following details:
Security 1: r1=0.16; 01-0.30; Security 2: r2=0.08; 2=0.25
Where r1 is the expected return of security 1 and o1 is the standard deviation of returns
of security 1;
r2 is the expected return of security 2 and o2is the standard deviation of returns of
security 2
The correlation coefficient (p12) between the returns of the two securities is -0.5
(i) Calculate the expected rate of return(r) and risk(o) for the following portfolios:
1.40% security 1 and 60% security 2
II.80% security 1 and 20% security 2
I
(ii) Given a risk-free rate of 4%, describe how Mr. Adani can use a combination of a risk-free
instrument and a risky portfolio with an expected return of 15% to achieve an expected return of
26%.
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