Portfolio Analysis
You have been given the expected return data in the following table for three assets -F,G, and H- for four years.
|
Year
|
Asset F
Expected Return
|
Asset G
Expected Return
|
Asset H
Expected Return
|
|
1
|
16%
|
17%
|
14%
|
|
2
|
17
|
16
|
15
|
|
3
|
18
|
15
|
16
|
|
4
|
19
|
14
|
17
|
For these three assets, you have isolated the three investment alternatives shown below:
|
Alternative
|
Investment
|
|
1
|
100% of asset F
|
|
2
|
50% of asset F and 50% of asset G
|
|
3
|
50% of asset F and 50% of asset H
|
The correlation coefficient of the returns between assets F and G is 0.25, and between F and H is -0.25.
a. Calculate the expected return over the 4-year period for each of the three alternatives.
b. Calculate the standard deviation of returns over the 4-year period for each of the three alternatives.
c. Use your findings in a and b to calculate the coefficient of variation for each of the three alternatives.
d. On the basis of your findings, which of the three investment alternatives do you recommend? Why?