Problem
You are currently invested in two index funds, one consists of all Chinese firms and the other all American firms. Both are considered to well represent the market of their home counties.
Although the correlation of these two funds has been increasing, it remains relatively small at 0.3. The Chinese Index fund has an expected return of 9.6% with a standard deviation for 40%. The American Index Fund has an expected return of 8.4% with a standard deviation of 25%,
1) What is the expected return and standard deviation of your portfolio returns if you have 350,000 invested in the Chinese fund and 750,000 invested in the American fund.
2) You are considering adding a newly listed biotech startup (not int the American Index fund) with some fun money. You've mapped out what you consider the only two scenarios for this company. The current stock price for the startup is $47/share. What is the expected return and standard deviation of returns for the startup?
Probability Share Price
FDA approv 30% $210.00
FDA rejects 70% $1.00
3) The returns of both index funds have no correlation with the FDA's decision. If you invest $30,000 of new fun money in this company, what is the expected return and standard deviation of your total portfolio?