Calculation Of Expected Return And Variance For Securities
Question
The expected returns, return variances, and the correlation between the returns of four securities are shown below.
|
Security |
Expected Return |
Variance of Returns |
Correlation |
|||
|
|
|
|
A |
B |
C |
D |
|
A |
0.17 |
0.0169 |
1.0 |
0.4 |
0.7 |
0.2 |
|
B |
0.13 |
0.0361 |
|
1.0 |
0.6 |
0.5 |
|
C |
0.09 |
0.0049 |
|
|
1.0 |
0.9 |
|
D |
0.07 |
0.0050 |
|
|
|
1.0 |
a. Determine the expected return and variance for a portfolio composed of 25% of security A and 75% of security B.
b. Determine the expected return and variance of a portfolio that contains 78% security A and 22% security B. Is this portfolio superior to that one in (a) above?
c. Calculate the expected return and variance of a portfolio that contains 60% security C and 40% security D.
d. If an investor were to select among the following three portfolios, which one would he or she prefer?
- An equally-weighted portfolio of securities A, B, and C.
- An equally-weighted portfolio of A, B, and D.
- An equally-weighted portfolio of B, C, and D.
e. If a risk-adverse investor desires to hold a portfolio of only two securities and expects a return of 11%, what would you advise the investor to do?
Summary
The question belongs to Finance and it discusses about expected returns and variance of a portfolio which contains 4 securities. These have been calculated and presented in the solution.
Total Word Count 163