In addition to the information in exercise 29 on the S&P 500 and core bonds, J.P. Morgan Asset Management reported that the expected return for real estate investment trusts (REITs) was 13.07% with a standard deviation of 23.17% (J.P. Morgan asset Management, guide to the Markets, 1st quarter, 2012). The correlation between the S&P 500 and REITs is .74 and the correlation between core bonds and REITs is −.04. You are considering portfolio investments that are composed of an S&P 500 index fund and REITs as well as portfolio investments composed of a core bonds fund and REITs. a. Using the information provided here and in exercise 29, determine the covariance between the S&P 500 and REITs and between core bonds and REITs. b. Construct a portfolio that is 50% invested in an S&P 500 fund and 50% invested in REITs. In percentage terms, what are the expected return and standard deviation for such a portfolio?

Question

In addition to the information in exercise 29 on the S&P 500 and core bonds, J.P. Morgan Asset Management reported that the expected return for real estate investment trusts
(REITs) was 13.07% with a standard deviation of 23.17% (J.P. Morgan asset Management, guide to the Markets, 1st quarter, 2012). The correlation between the S&P 500 and
REITs is .74 and the correlation between core bonds and REITs is −.04. You are considering portfolio investments that are composed of an S&P 500 index fund and REITs as well
as portfolio investments composed of a core bonds fund and REITs.
a. Using the information provided here and in exercise 29, determine the covariance
between the S&P 500 and REITs and between core bonds and REITs.
b. Construct a portfolio that is 50% invested in an S&P 500 fund and 50% invested in
REITs. In percentage terms, what are the expected return and standard deviation for
such a portfolio?

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