Question
In: Finance
You are given the following three stocks and you have been asked to propose a portfolio...
- You are given the following three stocks and you have been asked to propose a portfolio for a wealthy client. The client wants either a 2 asset (A-B, B-C, or A-C) or a 3 asset(A-B-C) portfolio. In any case, the portfolios must be equal weighted. Which of the four portfolios do you suggest to the client? Why?
Show your work step by step.
|
Stocks |
Mean Return |
Std of Return |
|
|
X |
1.5 |
4 |
|
|
Y |
4 |
8 |
|
|
Z |
7 |
1 |
|
|
Correlations |
|||
|
X and Y |
X and Z |
Z and Y |
|
|
0.5 |
0.2 |
0.7 |
|
Solutions
Expert Solution
Mean return on a 2-asset portfolio = 
Standard deviation of a 2-asset portfolio= 
Mean return on a 3-asset portfolio = 
Standard deviation of a 3-asset portfolio = 
We select a portfolio with the lowest Coefficient of variation = Standard deviation/ Mean return
Portfolio of A and B
Portfolio of A and C
Portfolio of B and C
Portfolio of A,B,C
Here, we observe that the portfolio consisting of A,B,and C has the lowest coefficient of variation and the same must be suggested to the client The coefficient of variation choses the best risk-reward portfolio.
jeff jeffy answered 1 year agoRelated Solutions
You are given the following three stocks and you have been asked to propose a portfolio...
You are given the following three stocks and you have been asked
to propose a portfolio for a wealthy client. The client wants
either a 2 asset (A-B, B-C, or A-C) or a 3 asset(A-B-C) portfolio.
In any case, the portfolios must be equal weighted. Which of the
four portfolios do you suggest to the client? Why? Show your work
step by step.
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Mean Return
Std of Return
X
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Correlations
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