Risk and Return with Varying Weights ■ We want to understand all the possible (expected return, volatility) combinations that can be obtained by combining US and JP. - Take an arbitrary portfolio with weights w on US and 1 - w on JP. ■ The expected return of the portfolio is: E[R₂] = w×0.136 + (1 − w)×0.150 ■ Back to p = 27%. The variance of the portfolio return is: Var(Rp) = w²x(0.154)² + (1 − w)²×(0.230)² - +2xwx(1 - w)×0.27×0.154×0.230

Risk and Return with Varying Weights ■ We want to understand all the possible (expected return, volatility) combinations that can be obtained by combining US and JP. - Take an arbitrary portfolio with weights w on US and 1 - w on JP. ■ The expected return of the portfolio is: E[R₂] = w×0.136 + (1 − w)×0.150 ■ Back to p = 27%. The variance of the portfolio return is: Var(Rp) = w²x(0.154)² + (1 − w)²×(0.230)² - +2xwx(1 - w)×0.27×0.154×0.230

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 2P: APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free...

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