Question

e. What is the standard deviation of expected returns, so, for each portfolio? Portfolio AB: % (Round to two decimal places.) You have been asked for your advice in selecting a portfolio of assets and have been supplied with the following data: You have been told that you can create two portfolios —one consisting of assets A and B and the other consisting assets A and C-by investing equal proportions (50%) in each of the two component assets. a. What is the average expected return, r, for each asset over the 3-year period? b. What is the standard deviation, for each asset's expected return? c. What is the average expected return, t, for each of the the portfolios? d. How would you characterize the correlations of returns of the two assets making up each of the portfolios identified in partc? e. What is the standard deviation of expected returns, s, for each portfolio? f. Which portfolio do you recommend? Why? Portfolio AC: % (Round to two decimal places.) f. Which portfolio do you recommend? Why? (Select the best choice below.) a. What is the average expected return, r, for each asset over the 3-year period? Asset A % (Round to one decimal place.) i Data Table Asset B]% (Round to one decimal place) Asset C % (Round to one decimal place) O A. Portfolio AB is preferred since it provides the same return as Portfolio AC but with less risk, as measured by the standard deviation. O B. Portfolio AC is preferred since it provides the same return as Portfolio AB but with less risk, as measured by the standard deviation. O C. Portfolio AB is preferred since it provides greater return than Portfolio AC but with more risk, as measured by the standard deviation, OD. Portfolio AC is preferred since it provides greater return than Portfolio AB but with more risk, as measured by the standard deviation. (Click on the icon located on the top-right comer of the data table below in order to copy its contents into a spreadsheet) b. What is the standard deviation, s. for each asset's expected return? Asset A % (Round to two decimal places.) Asset b ]% (Round to two decimal places) Asset C % (Round to huo decimal places) Year 2018 2019 2020 Asset A 11% 13% 1 5% Projected Return Asset B 16% 14% 12% Asset C 12% 16% c. What is the average expected return, 1,, for each of the two portfolios? Print Done Portfolio AB% (Round to one decimal place.) Portfolio AC: > (Round to one decimal place) d. How would you characterize the correlations of returns of the 2 assets making up each of the 2 portfolios identified in partc? Portfolio AB is perfectly correlated, while Portfolio AC is perfectly correlated (Select from the drop-down menus.

Answer 1

(2) Average expected Return of each asset ed Retuen Acret B Year Asset Asset C 2018 И . 167 12 Y 2019 137. 14% 147 2020 15% 12% 16% 39% 42% 42% Sum of Likums Average expected Reknen 13% 13% 14% 42 % 42% 394 Sum of Returns No. of years.

el. Standard deviation for each asset Expected Rekun. Standard deviation = Sum of squared deviations from Mean No. of Yeau. Standard deviation of Assut A. Year Rekum Deviation Squared Deviations 2. Mean (Average Relum 13% 13% 137. 2018 2019 2020 4 . 118. 131 151. 87. Sum of Squard deviations from mean. No. of years = 3 Se andand deviation ols 2.67 = 1.63

Seemdaad deviation of Assal of Year Reknen mean (Ang. Rekwen) Deviation from mean Squared seviation 2018 16% 14% 27 &% 2014 147. 141. 2020 12% 14%. - 27 4% BY Sum of Squared deviation - from mean. No. of years = 3 quard Dwiation Standard Deviation 1267= 1.63 No. of Tears. Standard deviation of Asset e Rekam Mean (Ang. Reenen) Year from Deviation Mean Squared Deviation 2018 -27 127 147. 4 % 2019 2020 14% 16% . 4 %. 14% 14 %. 2% Sum of Squared Derivation from . B% mean. standard deviations Sum of Squared deviation No. of years √2.67 = 1.63. I

c. Average expected Reknen from each of two partfolio. Packfolio I: 50% of Arrek A & 50% of Auck & Packfolio mught for Asut A - 0.5 – (50%. allocation] Pack folu might for Asset &- 0.5 – (50% allocation] Year Packfolio Asseed Rekuen Asset b Reknen Asset Weighted Reknen Asek & Weighted Return Relum' بالا م العا (Asse A+ Alett) 87 2018 8.5% 13-5% 16% (u7 x0.5) (16 %. 40.5) (5.54.+ 8y.) 2019 13% 14 % 6.5% 7% 13.5%. (13%. X0.5) (lky.40.5) (6.5%+7%) 2020 15%. 12% 7. 57 67. 13.51 (157X0.5) (124.80.5) (7.51. +64) Average Pack folio Relnen 13.5%. Pack folio 2: 50% of Asset A & 50% of Assell Portfolio weight of Asset A&C 50% or 0.5 each. Year Assett Assetl Assek A Asset C Patfold Rekuen Reknem Weighted Widghted Reknen. Rekuem Retwem 12v. 5.5% 6% 1.57 Cly. x6.5) (12%80.5) (5.5%+64) 2019 137. 144 6:57. 7. 13.5% (137. X0.5) (147X0.5) (6.547 77.) 2020 157. 16% 7.51. 15.5% (15%*0.5) (16%.x0.5) (7.5% +8%) (11.5%. + 13.5%. + 15.54) 13.51.415.54.) Average Packfolio Rek nen - 3 13.5%. 2018

(d) coulation of Acut in Cach Packfolio s Correlation Cofficient l Product of mean Deviation for) The Asseth in Portfolio ) = Product of Squared mean Deviations) of the Assets in the Pakfolio A & 50% of Asset of Portfolio 50% of Auct Year Astek A Rekuen. (a) Asset B Recuen. (6) Asseta mean Deviation (6) Aset B mean deviation (d) 2016 2019 2020 uv 18. 16% 14%. (11-137.) cxd e de -4% 4 4 - - - -22 - 21. - sv. 147, 121. 151. 27. – 27. – 44 4 4 Mean 137. 14r. 1 v Total br. 8x. bv. -8% Corulation & (exd) . Caffinent = - Jeex Ede VB 78% Hence, assets of Pat folis! (Asset A&B) are perfectly negalively correlated.

Pack folio 2 50%. of Acret A & 50% of Assell Asset A Assite Year Asset A Alsite mean mean Rekuen Rituen seviation Deviation (2) (6) (6) (d) (c)+(d) 2018 Us Qr. -27 - 27. 4% 2019 13% 14% - - c² dil d² 4%. 2020 15% 16% 27 27/ 4% 4% 40. Mean 13% 14% Total - 87. 8% 8 % Correlation E (exd) Ec² x Ed² Co > 8% - 87.x8s. - 87. 48% Since correlation is t, aselts au Caffirul of Portfolio 2 (Asset A & C) perfectly canelated.

E (f) Recommend portfolio 1 (50% of Awet A & 50% of Assit () as both Park folio 14 Park folio 2 yield same renen, however portfolio 2 cany a risk of kit wem (standard deviation of 1.63) in companion to fact folus (no. standard deviation).