Question

richard has two investment opportunities. He can invest in the sunglasses company or the umbrella company. if he diversifies his investment by putting 50% of his money into each company, what is the expected return and standard deviation of his portfolio

Answer 1

Answer:

Some information was missing, so i looked it up:

State of               Prob. of the state          Sunglasses            Umbrella

the economy      of the economy             Company               Corporation

Sunny                          .50                              25%                          0%

Rainy                           .50                               0%                          25%

expected returns:

Sunglasses Company = 0.5 x 25% = 12.5%

Umbrella Corporation = 0.5 x 25% = 12.5%,

so the expected return of the portfolio = (12.5% x 0.50) + (12.5% x 0.50) = 12.5%

standard deviation:

Sunglasses Company = √{[(0% - 12.5%)² + (25% - 12.5%)²] / 2} = √156.25 = 12.5%

Umbrella Corporation = √{[(0% - 12.5%)² + (25% - 12.5%)²] / 2} = √156.25 = 12.5%

so the standard deviation of the portfolio = 12.5%