(Chapter 6 An Introduction to Portfolio Management 208 4. The correlation coefficients for the same four combinations . Using the answers from parts (a), (b), and (d), calculate the expected return and stan dard deviation of a portfolio consisting of equal parts of (I) the S&P and the Russell 2000 and (2) the S&P and the Nikkei. Discuss the two portfolios . The standard deviation of Shamrock Corp. stock is 19 percent. The standard deviation of Cara Co. stock is 14 percent. The covariance between these two stocks is 100, What is the correlation between Shamrock and Cara stock? As chief investment officer of a small endowment fund, you are considering expanding the fune's strategic asset allocation from just common stock (CS) and fixed-income (FI) to include private real estate partnerships (PR) as well Current Allocation: 60 percent of Asset CS, 40 percent of Asset FI Proposed Allocation: 50 percent of Asset CS, 30 percent of Asset Fl, 20 percent of Asset PR ‘You also consider the following historical data for the three risky asset classes (CS, Fl, and PR) and the risk-free rate (RER) over a recent investment period: HL 5 Lo PR a 10 RFR ‘You have already determined that the expected return and standard deviation for the Current Allocation are: E(Rewrent) = 7.40 percent and dcxrens = 10.37 percent 1. Caleulate the expected return for the Proposed Allocation. b. Calculate the standard deviation for the Proposed Allocation, «. For both the Current and Proposed Allacations, calculate the expected risk premium per unit of risk (that is, [E(R,) — RFR|a). Using your calculations fom part (c), explain which of these two portfolios is the most likely to fall on the Markowitz efficient frontier. You are evaluating various investment opportunities currently available and you have cal: culated expected returns and standard deviations for five different well-diversified portfo. lios of risky assets 7.8% 10.5% 100. 140 46 50 ny 85. 62 78 a. For each portfolio, calculate the risk premium per unit of risk that you expect to receive (/E(R) — RFRV/e). Assume that the risk-free rate is 3.0 percent, b. Using your computations in part (a), explain which of these five portfolios is most likely to be the market portfolio. Use your calculations to draw the capital market line (M1). ¢ If you are only willing to make an investment with @ = 7.0 percent, is it possible for you to earn a return of 7.0 percent?