Question

1. The two-asset case The expected return for asset Als 5.50% with a standard deviation of 3.00%, and the expected return for asset Bis 5.25% with a standard deviation of 6.00% Based on your knowledge of efficient portfolios, fill in the blanks in the following table with the appropriate answers. Proportion of Portfolio in Security A Proportion of Portfolio in Security B W Expected Portfolio Return Standard Deviation 0, (%) Case I(PAR -0,4) WA TP Case II (PAN Case III(PAR -0.8) 3.0 1.00 5.50% 5.44% 2.1 0.75 0.50 0.25 0.00 0.00 0.25 0.50 0.75 1.00 5.31% 5.25% co 6.0 The minimum risk portfolio allocation to asset A within the portfolio for case II is . Therefore, you are better off

Answer 1

The return of a portfolio is the weighted return of the constituent stocks

The standard deviation of a portfolio is given by

Op = W;*W, *0; * 0;* Pij

Where Wi is the weight of the security i,

is the standard deviation of returns of security i.

and is the correlation coefficient between returns of security i and security j

When WA=1, WB =0, Expected portfolio return Rp = Ra = 5.5%

and Portfolio Standard Deviation = Stdev(A) = 3% (In all Cases I, II and III) (Select 3 from drop down)

When WA=0.75, WB =0.25, and Correlation coefficient = 0.4

Portfolio Standard Deviation = sqrt (0.75²*0.03²+0.25²*0.06²+2*0.75*0.25*0.03*0.06*0.4)

=sqrt(0.00100125)

=0.03164253 =3.16% or 3.2% (Select 3.2 from drop down)

When WA=0.5, WB =0.5, Expected portfolio return Rp = 0.5* 5.5%+0.5*5.25% = 5.375% (Select 5.38% from drop down)

When WA=0.25, WB =0.75, and Correlation coefficient = 0.8

Portfolio Standard Deviation = sqrt (0.25²*0.03²+0.75²*0.06²+2*0.75*0.25*0.03*0.06*0.8)

=sqrt(0.00262125)

=0.05119814 =5.12% (Select 5.1 from drop down)

The minimum risk portfolio allocation to Asset A within the portfolio for Case II is 1.00 . Therefore, you are better off holding Asset A in the portfolio