A fund manager’s high growth portfolio is made up of 80% (w1) in shares and 20% (w2 ) in bonds. Over the course of year 2010, the returns from each asset class are expected to have the following characteristics:
• 7% p.a. expected mean return from shares
• 3% p.a. expected mean return from bonds
• 9% p.a. standard deviation of returns from shares
• 5% p.a. standard deviation of returns from bonds
• zero covariance of share and bond returns.
Calculate:
(a) the variance of the portfolio
(b) the expected return on the portfolio.