You invest 60% of your financial assets in Standard & Poor's Depository Receipts with an expected return of 10% and a standard deviation of 20% and 40% of your financial assets in MSCI EAFE Index Fund with an expected return of 12% and a standard deviation of 30%. The correlation between the two investments is 35%. What are the expected return and the standard deviation of your portfolio?

Expected Return = 10.80%

Standard Deviation = 19.72%

Explanation:

Amount invested in Standard & Poor's Depository Receipts = 60%

Expected return of Standard & Poor's Depository Receipts = 10%

standard deviation of Standard & Poor's Depository Receipts = 20%

Amount invested in MSCI EAFE Index Fund = 40%

Expected return of MSCI EAFE Index Fund = 12%

Standard deviation of MSCI EAFE Index Fund = 30%

Correlation between the two investments = 35%

Now,

Expected Return = ∑ (Amount invested * Expected rate of return)

= 0.60 * 0.10 + 0.40 * 0.12

or

= 10.80%

Standard Deviation = √ (∑ (Amount invested * Standard deviation)) ²

= √[ (0.60) ² (0.20) ² + (0.40) ² (0.30) ² + 2 (0.60) (0.40) (0.20) (030) (0.35) ]

or

Standard Deviation = 19.72%