There are three assets A, B and C in the economy. The expected returns on assets A, B and C are 8%, 10% and 15% respectively. The volatilities of returns on assets A, B and C are 25%, 23% and 40% respectively. The correlation between the returns on assets A and B is 50%. The return on asset C is not correlated (correlation is equal zero) with either return on asset A or B. The investor has wealth of $5,000. Consider a portfolio P of assets A, B and C with weights 20%, 35% and 45% respectively.
a. Calculate the expected return and the volatility of (net) return on the portfolio.
b. Calculate the expected value and volatility of the value of the portfolio.
c. Suppose the investor invests one half of her wealth into a risk-free asset with return 5% and the second half into the portfolio P . Calculate the expected value and volatility of the value of this investment.