The expected returns, return variances, and the correlation between the returns of four securities are shown below.
Security Expected Return Variance of Returns Correlation
A B C D
A 0.17 0.0169 1.0 0.4 0.7 0.2
B 0.13 0.0361 1.0 0.6 0.5
C 0.09 0.0049 0.1 0.9
D 0.07 0.0050 1.0
a. Determine the expected return and variance for a portfolio composed of 25% of security A and 75% of security B.
b. Determine the expected return and variance of a portfolio that contains 78% security A and 22% security B. Is this portfolio superior to that one in (a) above?
c. Calculate the expected return and variance of a portfolio that contains 60% security C and 40% security D.
d. If an investor were to select among the following three portfolios, which one would he or she prefer?
o An equally-weighted portfolio of securities A, B, and C.
o An equally-weighted portfolio of A, B, and D.
o An equally-weighted portfolio of B, C, and D.
e. If a risk-adverse investor desires to hold a portfolio of only two securities and expects a return of 11%, what would you advise the investor to do?