HELP! i want to believe that this question is wrong determine, question, expected, standard

ramdabom

If the correlation between Pluto and Neptune is 0.25, determine the expected return and standard deviation of a portfolio that consists of 65% Pluto Corporation stock and 35% Neptune Corporation stock.
A)
10.3% expected return and 2.58% standard deviation.
B)
10.3% expected return and 16.05% standard deviation.
C)
10.0% expected return and 16.05% standard deviation.
Your answer: B was correct!
ERPort
= (WPluto)(ERPluto) + (WNeptune)(ERNeptune)

= (0.65)(0.11) + (0.35)(0.09) = 10.3%

RealEstate_CFA

No, if you use 0.13 and 0.22 and forget to take the square root of it you will get 0.0257724 but if you (correctly) find the square root of this answer, you will get 0.1605378 (which if taken to a percentage will give you 16.05%).
For your second question, I have said that you would need to square and then cube the second and third year discount rates (which is your bolded point), but this doesn’t change the fact that you would use this discount rates which is all that the question is asking.
It is saying, would you (a) just you the 3 year discount rate (b) use the respective discount rate for each cash flow or (c) take the geometric mean (average) of the 3 years.
Hope we are on the same page?

jcfa2011

wtf all those numbers from question 1 come from? @@

Carson

herrgrunta wrote:
tonydaboiii wrote:
wtf all those numbers from question 1 come from? @@
The OP didn’t include all of the information that would normally be in a question, but I extrapolated them from his answer.
The full question would have noted that the first security has an 11% return and a 22% standard deviation and the second asset would have had a 9% return and a 13% standard deviation. Also (as was noted in the OP) the 2 assets had a 0.25 correlation.
Beyond this, his answer is just the calculation you would use for expected return and standard deviation of the 2 assets in the 65%/35% proportion discussed in the OP.
I really hope this makes sense for you now otherwise I would strongly advise a review of the Quant readings prior to Saturday!!!
Thanks, that makes much more sense. Hahah I think I’ll do fine on questions of this type, b/c after all portfolio valuations & risk assessment was one of the best courses I scored during undergrad. The calculations are pretty mechanical.