Security A Security B Expected return 15% 10% Standard Deviation 0.25 0.17 Beta 1.3 1.1 Correlation coefficient between A and B 0.5 Suppose you invest 30% of your money in Security A and the rest in Security B
a) What is the expected return of the portfolio?
b) What is the portfolio beta?
c) What is the portfolio variance? Compare it with A and B variances. Is the portfolio variance larger or smaller than either A or B variances and why?
d) What percentage of your portfolio variance comes from the “interaction” component of total risk?