26 Sep Expected Return Standard Deviation Lo-Risk Fund (LRF) ?.10 ?.18 Hi-Risk Fund (HRF) ?.20 ?.34 You know that the correlation between returns from LRF and HRF is 0.15. (Covariance i
Expected Return Standard Deviation
Lo-Risk Fund (LRF) .10 .18
Hi-Risk Fund (HRF) .20 .34
You know that the correlation between returns from LRF and HRF is 0.15. (Covariance is 0.00918.)
a. What is the expected return of a portfolio that is 60% LRF and 40% HRF? What is the standard deviation of this portfolio?
b. What makes a portfolio efficient? The minimum risk portfolio of LRF and HRF contains 82% LRF and 18% HRF. Is the portfolio you derived in part a. an efficient combination of the two funds? Briefly explain. (You should be able to answer this question without further calculations.)
c. Suppose Treasury Bills are also available. They return 4% and are risk-free. Create a portfolio from HRF and Treasury Bills with the same expected return as the portfolio in part a. Is this portfolio superior to the portfolio in part a.? Support your answer with appropriate analysis.
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