Answer:
To calculate the risk and return of the portfolio, we first need to calculate the portfolio's expected return and standard deviation.
Since the securities are equally weighted, each security has a weight of 1/3 in the portfolio.
Expected return of the portfolio:
Expected return = (weight of P x expected return of P) + (weight of Q x expected return of Q) + (weight of R x expected return of R)
Expected return = (1/3 x 25) + (1/3 x 22) + (1/3 x 20)
Expected return = 22.33%
Standard deviation of the portfolio:
We can use the formula for portfolio standard deviation:
σp = √[w1^2σ1^2 + w2^2σ2^2 + w3^2σ3^2 + 2w1w2ρ12σ1σ2 + 2w1w3ρ13σ1σ3 + 2w2w3ρ23σ2σ3]
where:
w1, w2, w3 are the weights of the three securities in the portfolio (1/3 each in this case)
σ1, σ2, σ3 are the standard deviations of the securities
ρ12, ρ13, ρ23 are the correlations between the securities
Substituting the given values, we get:
σp = √[(1/3)^2(25)^2 + (1/3)^2(22)^2 + (1/3)^2(20)^2 + 2(1/3)(1/3)(0.30)(25)(22) + 2(1/3)(1/3)(0.60)(25)(20) + 2(1/3)(1/3)(0.40)(22)(20)]
σp = 2.78%
Therefore, the risk and return of the portfolio are 22.33% and 2.78%, respectively.
Step-by-step explanation: