Answer Happy

An example of Mean-Variance Analysis
It is possible to calculate which investments have the greatest
variance and expected return. Assume the following investments are
in an investor's portfolio:
- Investment A: Amount = $100,000 and expected
return of 5%
- Investment B: Amount = $300,000 and expected
return of 10%
In a total portfolio value of $400,000, the weight of each asset
is:
- Investment A weight = $100,000 / $400,000 =
25%
- Investment B weight = $300,000 / $400,000 =
75%
=> Portfolio expected return = (25% x 5%) + (75% x 10%) =
8.75%.
The correlation between the two investments is 0.65. The standard
deviation, or square root of variance, for Investment A is 7%, and
the standard deviation for Investment B is 14%.
=> Portfolio variance = (25% ^ 2 x 7% ^ 2) + (75% ^ 2 x 14% ^ 2)
+ (2 x 25% x 75% x 7% x 14% x 0.65) = 0.0137
The portfolio standard deviation is the square root of the
answer: 11.71%.
My questions:
1. How can I get the correlation between the two
investments is 0.65?
2. Where can I get the standard deviation of Investment
A (7%) and Investment B (14%)?
3. What should an investor make decisions after he
got:
- Portfolio expected return =
8.75%.
- Portfolio variance = 0.0137
- Portfolio standard deviation =
11.71%.