Suppose that there are two assets with ?í = 0.12, 72 = 0.15, 01=0.20, 02 = 0.18, and 012 = 0.01. A portfolio is formed with weights wi= 0.25 and w2 = 0.75. a) Calculate the expected rate of return of portfolio. (8p.) b) Calculate the variance of portfolio return. (12p.)

Expected rate of rate of return of portfolio = w₁ * r₁ + w₂ * r₂

Expected rate of rate of return of portfolio = 0.25 * 0.12 + 0.75 * 0.15

Expected rate of rate of return of portfolio = 0.1425 or 14.25%

Variance of portfolio return = (w₁ *  ₁)² + (w₂ *  ₂)² + (2 * w₁ * w₂ *  ₁ *  ₂ *  _1,2)

Variance of portfolio return = (0.25 * 0.20)² + (0.75 * 0.18)² + (2 * 0.25 * 0.75 * 0.20 * 0.18 * 0.01)

Variance of portfolio return = 0.02086 or 2.086%