Question

In: Accounting

As a potential investor you have three alternatives presented to you in the table below. Your...

As a potential investor you have three alternatives presented to you in the table below. Your goal is to construct a portfolio of two assets (each with equal weights) chosen from the three alternatives below.

Economic Scenario

Probability

Return: A

Return: B

Return: Risk Free Asset (RFA)

Recession

20%

5%

7%

10%

Normal

60%

15%

14%

10%

Boom

20%

25%

21%

10%

A

B

Expected Return

15%

14%

Variance

40

19.6

Covariance of A and B: +28
  1. Calculate the correlation coefficient of the following three portfolios:
    1. A and B                                                                                               [2 MARKS]
    2. A and RFA                                                                                            [1 MARK]
    3. B and RFA                                                                                            [1 MARK]
  2. Calculate the expected return of the following portfolios:
    1. A and B                                                                                                 [1 MARK]
    2. A and RFA                                                                                             [1 MARK]
    3. B and RFA                                                                                             [1 MARK]
  3. Calculate the standard deviation of the following portfolios:
    1. A and B                                                                                               [3 MARKS]
    2. A and RFA                                                                                          [2 MARKS]
    3. B and RFA                                                                                          [2 MARKS]

Calculate the coefficient of variation of the following por

Solutions

Expert Solution

Answer to question can be found in the attached images.

please go through it.

Working Note

Calculation of Correlation Coefficient

Calculation of Expected Return pf Portfolio

Working Note to Question C

Calculation of Standard deviation of portfolio

Please feel free to reach or comment back if you need further clarity or something missing.

ekkarill92 answered 2 years ago
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