Problem:
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?
Additional Information:
This question basically belongs to Finance as well as it describes about expected returns and variance of a portfolio which haves 4 securities. These have been computed and presented in the solution.