Response to the following problem:
You have been asked for your advice in selecting a portfolio of assets and have been sup- 2 plied with the following data.
| |
Expected Return (%) |
| Year |
Asset A
|
Asset 8
|
Asset C
|
|
2012
|
12
|
16
|
12
|
|
2013
|
14
|
14
|
14
|
|
2014
|
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 average expected return, for each asset over the three-year period?
b. What is the standard deviation, s, for each asset's expected return?
c. What is the average expected return, for each of the two portfolios?
d. How would you characterise 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 of expected returns, sp, for each portfolio?
f. Which portfolio do you recommend? Why?