Question

Portfolio analysis You have been given the expected return data shown in the first table on three assets-F, G, and over the period 2016-2019: Using these assets, you have isolated the three investment alternatives shown in the following table: a. Calculate the average return over the 4-year period for each of the three alternatives, b. Calculate the standard deviation of returns over the 4-year period for each of the three alternatives, c. Use your findings in parts a and b to calculate the coefficient of variation for each of the three alternatives d. On the basis of your findings, which of the three investment alternatives do you think performed better over this period? Why?

Answer 1

Sol:

a. Expected return over the 4-Year period
Alternative 1
100% of Asset F
(16%+17%+18%+19%)/4=
17.5%
Alternative 2
50% Asset F & 50% Asset G
	Expected return
2016	(50%*16%)+(50%*17%)=	16.5%
2017	(50%*17%)+(50%*16%)=	16.5%
2018	(50%*18%)+(50%*15%)=	16.5%
2019	(50%*19%)+(50%*14%)=	16.5%
			66.0%
Expected return over the 4 Year period= 66%/4= 16.5%
Alternative 3
50% Asset F & 50% Asset H
	Expected return
2016	(50%*16%)+(50%*14%)=	15%
2017	(50%*17%)+(50%*15%)=	16%
2018	(50%*18%)+(50%*16%)=	17%
2019	(50%*19%)+(50%*17%)=	18%
			66.0%
Expected return over the 4 Year period= 66%/4= 16.5%

b. Standard Deviation= (sum of the squares of differences)/(n-1)

Alternative 1

100% of Asset F

(16%-17.5%)^2+(17%-17.5%)^2+(18%-17.5%)^2+(19%-17.5%)^2

0.0500%

0.0001667

1.29%

Alternative 2

50% Asset F & 50% Asset G

All the 4 years'expected returns are 16.5 %

So

Std. deviation= 0

Alternative 3

50% Asset F & 50% Asset H

(15%-16.5%)^2+(16%-16.5%)^2+(17%-16.5%)^2+(18%-16.5%)^2=

0.0500%

0.000167

1.29%

c. Coeffeicient of Variation

Alternative 1

100% of Asset F

Coeff. Of Var.= Std. devn./Exp.Return

1.29%/17.5%=

0.0737

Alternative 2

50% Asset F & 50% Asset G

0/16.5%=

0

Alternative 3

50% Asset F & 50% Asset H

1.29%/16.5%=

0.0782

d. Alternative 2 is recommended as its std. devn. & coeff. Of variation Is 0