Question

le three alternatives. c. Use your findings in parts a and b to calculate the coefficient of variatio each of the three alternatives. d. On the basis of your findings, which of the three investment alternatives do recommend? Why? LG 4 P8-15 Correlation, risk, and return Matt Peters wishes to evaluate the risk and return be haviors associated with various combinations of assets V and W under three as- sumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative The expected returns and standard deviations calculated for each of the assets are shown in the following table. Asset Expected return, 7 8% 13 Risk (standard deviation), o, 5% 10 W

Answer 1

Answer: Asset Expected Retum, i Risk (6) 87 S% W 13 107 • Expected Return oq portfolio is" weighted Average Return S FORMULA : 1 - (Ww X 2) + (Wwxrw) - FORMULA 2 wir + who + 2 Wr Ww grow & (r,w) W = Weight of Asset'v'; Ww: Woight of Asset w 8 = Return of Asset v' iw = Return of Assetu 8v, w) as Correlation coolficient between Asset ys w

Colculation of Portfolio Risk لطلبا 13% Coxa when Correction Gefficient is 18 = +11 Weights Assigned Expected Return 1oox 0.25 0.75 11.751 0.50 0.50 10.51 0.75 0.25 9.251 100) 0 81 Formula: 1 107 8.751 7.51 6.251 5%. formula: 2 (b) Colculation of Portfolio 102 7.60354 5.59027 4.5069% 5 % FORMULA: 2 CASE IT When r=0 ie. uncorrelated Weighted Assigned Expected Wv ww Potun 0 1001 131. 0.25 0.5 11.751 aro 0.0 10.5% 0.75 0.25 9.25% 100 FORMULA : 1 when &=-1 i.e. Negatively Correlted Weighted Assigned Expected Wo Ww o 100% 13% 0.25 0.75 0.50 0.75 0.25 9.254 190 0 8 . FORMULA: 1 Return Colculation of Portfolio Retom 6.25% oSD 10.50 1.25% 5%. JE FORMULA. and