Question

You have been asked for your advice in selecting a portfolio of assets and have been given the following data:

Expected return

Year Asset A Assest B Assest C

2019 12% 16% 12%

2020 14% 14% 14%

2021 16% 12% 16%

You have been told that you can create two portfolios—one consisting of assets A and B and the other consisting of assets A and C—by investing equal proportions (50%) in each of the two component assets.

a. What is the expected return for each asset over the 3-year period?

b. What is the standard deviation for each asset’s return?

c. What is the expected return for each of the two portfolios?

d. How would you characterize the correlations of returns of the two assets making up each of the two portfolios identified in part c?

e. What is the standard deviation for each portfolio?

f. Which portfolio do you recommend? Why?

(please show step by step really need help, thank you)

Answer 1

First we will prepare table containing all required data

a. Expected Return

we will consider average return as expected return

Expected return of A

=42/3 =14

Expected return of B

=42/3 =14

Expected return of C

=42/3 =14

b. Standard Deviation

Standard deviation of A

Standard deviation of B

Standard deviation of C

c. Expected return of portfolio

expected return of portfolio A & B

expected return of portfolio A & C

d. Correlation

Correlation of portfolio A & B

Correlation of portfolio A & C

e. Standard Deviation of Portfolio

Standard deviation of Portfolio A & B

Standard deviation of Portfolio A & C

f. Recommended portfolio is A & B. Because standard deviation of portfolio is Zero, which means that portfolio has zero systematic risk.