Question

Assume you are considering a portfolio containing Asset 1 and Asset 2. Asset 1 will represent 38 % of the dollar value of the​ portfolio, and asset 2 will account for the other 62 %.

Assume that the portfolio is rebalanced at the end of each year. The expected returns over the next 6​ years, 2021--2026​, for each of these assets are summarized in the following​ table:

    Projected Return  
Year   Asset L   Asset M
2021      -9             33
2022      14             7
2023   25           -9
2024      4            20
2025       -9            35
2026       33          -17

a. Calculate the expected portfolio​ return,r Subscript p​,for each of the 6 years.

b. Calculate the average expected portfolio​ return,r overbar Subscript p, over the​ 6-year period.

c. Calculate the standard deviation of expected portfolio​ returns,s Subscript p, over the​ 6-year period.

d. Assume that asset 1 represents 62 % of the portfolio and asset 2 is 38 %.

Calculate the average expected return and standard deviation of expected portfolio returns over the​ 6-year period.

e. Compare your answers in part d to the answers from parts b and c.

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a.

The expected portfolio​ return, r Subscript p​, for 2021 is ____​%. ​(Round to two decimal​ places.)

The expected portfolio​ return,r Subscript p, for 2022 is _____​%. ​(Round to two decimal​ places.)

The expected portfolio​ return, r Subscript p, for 2023 is______% ​(Round to two decimal​ places.)

The expected portfolio​ return,r Subscript p, for 2024 is______​% ​(Round to two decimal​ places.)

The expected portfolio​ return,r Subscript p​, for 2025 is______%​(Round to two decimal​ places.)

The expected portfolio​ return,r Subscript p for 2026 is_______% ​(Round to two decimal​ places.)

b. The average expected portfolio​ return,r overbar Subscript p,over the​ 6-year period is _______​%. ​(Round to two decimal​ places.)

c. The standard deviation of expected portfolio​ returns,s Subscript p​,over the​ 6-year period is _______​%. ​(Round to three decimal​ places.)

d. If asset L represents 62 % of the portfolio and asset M 38 %,the average expected portfolio​ return, r overbar Subscript p​,over the​ 6-year period is _______%​(Round to two decimal​ places.)

If asset L represents 62 % of the portfolio and asset M 38 %​, the standard deviation of expected portfolio​ returns, s Subscript p​, over the​ 6-year period is ______%. ​(Round to three decimal​ places.)

e. Compare your answers in part d to the answers from parts b and c.

Which of the following statements is​ correct?  ​(Select the best choice​ below.)

A.Compared to part d​, in parts b and c we are getting a higher return at the cost of a higher standard deviation. This occurs because we are investing more heavily in the riskier asset.

B.Compared to part d​, in parts b and c we are getting a lower return at the cost of a higher standard deviation. This occurs because we are investing more heavily in the riskier asset.

C.Compared to part d​, in parts b and c we are getting a higher return at the cost of a lower standard deviation. This occurs because we are investing more heavily in the riskier asset..

D. Compared to part d​, in parts b and c we are getting a higher return at the cost of a higher standard deviation. This occurs because we are investing more heavily in the less risky asset.

Answer 1

First of all below Excel sheet data gives answers of a,b and c :-

YEAR Asset M -9 Asset L 2021 2022 2023 2024 2025 2026 port. return 33 17.04 9.66 -9 3.92 20 13.92 35 18.28 25 10 11 12 -17 13 14 15 Average expected portfolio return Stadard deviation of portfolio return 10.80333333 6.792589099 16

Formulas used:-

Expexted portfolio return :- ​​​​​​=(B7*0.38)+(C7*0.62)

Average return on portfolio :- =AVERAGE(D7:D12)

Standard deviation of portfolio :- =STDEV(D7:D12)

Now let's take

Q.(d)

А в ср YEAR Asset L Asset M -9 33 2021 2022 2023 2024 2025 2026 port. return 6.96 9.66 3.92 13.92 18.28 20 35 -17 14 15 Average expected portfolio return Stadard deviation of portfolio return 9.123333333 6.158524715 16 17
Formulas used :-

​​for Expected return on portfolio :- =(B7*0.62)+(C7*0.38)

Other formulas are as same as in above question.

Q.(e)

A.Compared to part d​, in parts b and c we are getting a higher return at the cost of a higher standard deviation. This occurs because we are investing more heavily in the riskier asset.

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