Question

please include formulas

126% T View Zoom Add Category Chart Insert Table Text Shape Media 7-6 10 11 PROBLEM 7-6 12 13 Effect on Risk of Adding a New Asset to a Portfolio 14 15 Given 16 Expected Return of existing portlolo A Standard deviation of existing portfollo A 17 9.00% 3.00% 18 19 20 Expected Retum of new asset B Standard deviation of new asset B 12.00% 400% 21 22 23 Amount invested in Portfolio A Amount to be invested in Asset B $700,000 $200,000 24 25 26 Corelation coeficient r bebween 27 existing portfolio A and new asset 8 0 28 29 Preliminary calculations: 30 31 32 33 34 35 Coefficient of variation of existing porfolio A Coefficient of variation of new asset B Total value of new combined portfolio 36 Weight of existing assets in combined portfolio Weight of new asset B in combined portfolio 37 38 39 Expected Return of combined portfolio per equation 7-1 40 41 42 Comparison. of standard deviations of existing and new combined portfolios 43 44 Standard deviation of new combined portfolio per equabion 7-5 Standard deviation of existing portfolio A (given) 45 46 3.00% 47 48 Comparison.of coafficients of variatign of existing and new combined portfolios 49 50 Coefficient of Variation of new combined portfolio Coefficient of Variation of existing portfolio A 52 0.00% PROBLEM 7-6 Text MacBook Air esc FI F2 F3 EA

Answer 1

82 Given: 83 Expected return of existing portfolio A 84 Standard deviation of existing portfolio A BC A. Comparison of standard deviation of existing and new combined portfolios: 9.00% Standard deviation of new combined portfolio Standard deviation of existing portfolio A (given) 2.50% 3.00% 3.00% 85 86 Expected return of new asset B 87 Standard deviation of new asset B 12.00% 4.00% B. Comparision of coefficients of variation of new combined portfolio Coefficient of variation of new combined portfolio Coefficient of variation of existing portfolio A 0.2583 0.3333 7 00.00 200.00 89 Amount invested in Portfolio A 90 Amount to be invested in Asset B 91 92 Coefficient correlation b/w A&B 94 Preliminary calculations: 95 Coefficient of variation of existing portfolio A 96 Coefficient of variation of new asset B 0.3333 0.3333 900.00 98 Total value of new combined portfolio 99 100 Weight of existing assets in combined portfolio 101 Weight of new asset B in combined portfolio | 77.78% 22.22% 102 103 Expected return of combined portfolio 9.67%

Formulas:

82 Given: 83 Expected return of existing portfolio A 84 Standard deviation of existing portfolio A 0.09 0.03 A. Comparison of standard deviation of existing and new combined portfolios: Standard deviation of new combined portfolio =SQRT (B100*884)^2+(B101*B87)^2+(2*B100*B101*192*B84*B87)) Standard deviation of existing portfolio A (given) =B84 86 Expected return of new asset B 87 Standard deviation of new asset B 0.12 0.04 B. Comparision of coefficients of variation of new combined portfolio Coefficient of variation of new combined portfolio Coefficient of variation of existing portfolio A =E83/B103 =B95 700 89 Amount invested in Portfolio A 90 Amount to be invested in Asset B 200 92 Coefficient correlation b/w A & B 94 Preliminary calculations: 95 Coefficient of variation of existing portfolio A 96 Coefficient of variation of new asset B =B84/883 =B87/886 97 98 Total value of new combined portfolio =B90+389 100 Weight of existing assets in combined portfolio =B89/898 101 Weight of new asset B in combined portfolio =1-0100 102 103 Expected return of combined portfolio =(B100*883)+(B101*886)