An Investor Has Her $1 Million Portfolio Invested in Two

question 28

Essay

An investor has her $1 million portfolio invested in two different mutual funds as follows: $400,000 in a small-cap fund and $600,000 in a balanced fund. The small-cap fund has an expected return of 12% and a variance of 625, whereas the balanced fund has an expected return of 7% and a variance of 81. The covariance between the two funds is 122.
A. Find the investor's expected portfolio return.
B.Find the standard deviation for the investor’s portfolio.
C. Assuming the portfolio’s returns are normally distributed, find the range of returns that the investor is 95% confident her portfolio return will fall within.

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Definitions:

Working Capital

The difference between a company's current assets and current liabilities, indicating the short-term financial health and operational efficiency.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including materials and labor.

Sales

The total amount of goods or services sold by a company, contributing to its revenue.

Sunk Cost

A cost that has already been incurred and cannot be recovered, which should not affect future business decisions.