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Coleman is considering investing his funds in two assets. His assessment of each investment is as...

Coleman is considering investing his funds in two assets. His assessment of each investment is as follows:

Item

Asset 1

Asset 2

Expected Return (%)

15

15

Standard Deviation (%)

10

25

Required:

  1. If the correlation coefficient is 0.75, and Coleman decides to put 35% of his funds in Asset 1, what are the expected return and the standard deviation of return of Coleman’s Portfolio? Is Coleman better or worse off as a result of investing in two assets (Asset 1 and Asset 2) rather than just in one asset?
  2. If the correlation coefficient is 0.25, and Coleman decides to put 65% of his funds in Asset 1, what is the standard deviation of return of Coleman’s Portfolio? Is Coleman better or worse off if he splits his funds in this way?
  3. If the correlation coefficient is -0.25, and Coleman decides to put 35% of his funds in Asset 1, what is the standard deviation of return of Coleman’s Portfolio? Is Coleman better or worse off if he splits his funds in this way?
  4. If the correlation coefficient is -0.75, and Coleman decides to put 65% of his funds in Asset 1, what is the standard deviation of return of Coleman’s Portfolio? . Is Coleman better or worse off if he splits his funds in this way?

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Expected return of Asset 1 , Asset 2 and all portfolio combination at different correlation coefficient is same i.e 15%, Thus, an investment with lowest standard deviation would be better investment.

Portfolio in (d), has lowest standard deviation and same expected return thus it is a better choice.

jeff jeffy answered 2 years ago
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