Question

Portfolio Return Risk

A & B 1.64% 4.49%

B & C 1.59% 3.54%

A & C 1.62% 4.77%

C & D 1.15% 3.66%

A & D 1.21% 4.59%

B & D 1.18% 3.30%

Q1. By computing the ratio of (R_p/?_p ) select the best investment that you should undertake, assuming you are a risk averse investor. Explain the rationale for your choice of investment.

Q2. Draw a portfolio graph (showing Risk on the X-axis and Return on the Y-axis) for the investment portfolio that you have chosen in (4) above for a range of investment weights that you could choose from (i.e., You could invest 0% in one company and 100% in the other or 5% in one company and 95% in the other and so on).Determine from the portfolio graph, the minimum risk that you could obtain for this portfolio and the respective weightings that should be invested in each of the securities in the portfolio.                                                                  

Answer 1

Portfolio	return	risk	portfolio return to risk ratio = portfolio return/portfolio risk	co-efficent of variance = standard deviation/return
A & B	1.64	4.49	0.37	2.737805	274%
B & C	1.59	3.54	0.45	2.226415	223%
A & C	1.62	4.77	0.34	2.944444	294%
C & D	1.15	3.66	0.31	3.182609	318%
A & D	1.21	4.59	0.26	3.793388	379%
B & D	1.18	3.3	0.36	2.79661	280%
On the basis of portfolio return to risk ratio, a risk averse investor would invest in portfolio of B & C because this portfolio offers highest return in comparison of per unit of risk
Portfolio	return	risk	co-efficent of variance = standard deviation/return
A & B	1.64	4.49	274%
B & C	1.59	3.54	223%
A & C	1.62	4.77	294%
C & D	1.15	3.66	318%
A & D	1.21	4.59	379%
B & D	1.18	3.3	280%
It can further be seen that on the basis of risk per unit of return is lower In the case of portfolio B& C so it should be choosen for investment on the basis of risk