Skip to content

NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Investment

Ms. Nair holds a portfolio with 60% in Asset A (expected return 10%, standard deviation 20%) and 40% in Asset B (expected return 15%, standard deviation 30%). The correlation between the two assets is +1. What are the portfolio's expected return and standard deviation?

The expected return is 12% and the standard deviation is 24%. Return is the weighted average of 10 and 15 percent. With perfect positive correlation there is no diversification benefit, so risk is also the weighted average of 20 and 30 percent.

  1. A12.0% and 24.0%Correct
  2. B12.0% and 18.0%
  3. C13.0% and 24.0%
  4. D12.5% and 25.0%

Explanation

Expected return = 0.6x10 + 0.4x15 = 12%. With correlation +1, standard deviation is the weighted average = 0.6x20 + 0.4x30 = 12 + 12 = 24%. Check with the formula: variance = (12)^2 + (12)^2 + 2x12x12 = 576, so the square root is 24. 18% would need a lower correlation.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Investment shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to InvestmentFree diagnostic mock

More Introduction to Investment questions