Homework Answers
| formula = rp = WL*RL + WM*RM | |||||
| WL=0.75, WM=0.25 | |||||
| ANSWER (a) | Year | Asset L (RL) | Asset M (RM) | Portfolio Return (rp) | EXCEL FORMULA USED |
| 2013 | 16% | 24% | 18% | [= 0.75*C4 + 0.25*D4 ] | |
| 2014 | 17% | 22% | 18.25% | SAME WAY FOR OTHERS YEARS | |
| 2015 | 19% | 20% | 19.25% | ||
| 2016 | 19% | 18% | 18.75% | ||
| 2017 | 20% | 16% | 19% | ||
| 2018 | 21% | 14% | 19.25% | ||
| ANSWER (b) | AVERAGE EXPECTED DEVIATION OF PORTFOLIO RETURN = | 18.75% | SUM(E4:E9)/6 | ||
| ANSWER ( c) | STANDARD DEVIATION OF PORTFOLIO RETURN = | 0.52% | STDEV(E4:E9) | ||
| ANSWER (d) | CORRELATION BETWEEN ASSET L & M = | -0.976 | CORREL(C4:C9,D4:D9) | ||
| AS CORRELATION OF ASSETS BETWEEN L & M IS NEGATIVE | |||||
| ANSWER (e) | BY CREATION OF PORTFOLIO | ||||
| AS CORRELATION OF ASSETS L & M IS NEGATIVE. HENCE, THE STANDARD DEVIATION WILL DECREASE. | |||||
| WHICH WILL REDUCE RISK FOR INVESTORS | |||||
| BY COMBINING THESE TWO NEGATIVELY CORRELATED ASSETS, THE OVERALL PORTFOLIO RISK IS REDUCED | |||||
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