Asked by Ashley
You own shares of Fidelity Magellan Fund (FMF), which concentrates on stocks of large American companies. Its monthly return is μFMF = 1.4% and sFMF = 4.70%.
You decided to diversify your portfolio by adding shares of the Fidelity Japan Fund (FJF), which has monthly returns μFJF = 1.6% and sFJF = 6.80%.
Show that having a mix of these two funds (40% FMF and 60% FJF) has both a higher mean return and less volatility (variability) than FMF alone. Consider that correlation between returns of FMF and FJF is r = 0.25.
You decided to diversify your portfolio by adding shares of the Fidelity Japan Fund (FJF), which has monthly returns μFJF = 1.6% and sFJF = 6.80%.
Show that having a mix of these two funds (40% FMF and 60% FJF) has both a higher mean return and less volatility (variability) than FMF alone. Consider that correlation between returns of FMF and FJF is r = 0.25.
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