Question

In: Finance

You are given the following three stocks and you have been asked to propose a portfolio...

  1. 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 ago
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