Question

Read the following case-lets and answer the questions

Ms Meera has received a gift from her father of Rs 2,00,000 on her 25th birthday and wishes to invest in stocks. She wants to start with creating a Two-asset portfolio. She has approached you her good friend whom she trusts to provide her guidance regarding how to create a Two-asset portfolio.
You being a fresh MBA graduate from premium B-school are looking forward to conduct a research on the securities to be included in the 2-Asset portfolio and give her an informed advice. From your research you identify 2 securities- namely S1 and S2 and have gathered the following data about them.
Particulars S1 S2 Expected Return 15% 20% Std deviation 12% 16% Coefficient of correlation (r) between S1 and S2 = 0.15. After her giving her this basic information; Meera wants to know if she goes for following different combinations of portfolios
1. All funds are invested either only in S1 or S2
2. 75% of funds in S1 and 25% in S2 3. 25% of funds in S1 and 75% in S2 4. 50% of funds in each S1 and S2
What would be the expected return and risk associated under different portfolios?
Which portfolio is best for her from point of risk and which portfolio is best from point of view of return?

Answer 1

Given ,

Return of S1-    R_{1 =} 15%

Std deviation of S1- , =20%

Return of S2        -     R_{2   =}12%

Std deviation of S2 - , = 16%  

The expected return of a portfolio = W₁XR_{1 +} W₂XR₂

Std deviation of a porfolio =  

applying the above 2 formulas we can get the expected return and std deviation for each portfolio options

the excel formulas are:

2) from the risk perspective,- she can select the 4th Option ,i.e. Investing    25% is S1 and the balance 75% in S2-           since it has the lowest Portfolio risk of 13.67%

from the return perspective,- she can select the 1st Option , i.e. investing the entire 200,000 into S1 -          since it has the Highest Portfolio return of 15%