You are contemplating a portfolio of two risky assets, comprising 75% in Deakin Ltd and 25% in Hall Ltd.
Your broker's analyst has predicted that, on an ongoing basis, the expected returns from these assets will be 8% per annum from Deakin Ltd and 10% per annum from Hall Ltd.
The standard deviations of the returns from the assets are expected to be 9% for Deakin Ltd and 11% for Hall Ltd.
The correlation between the two assets is 0.30.
Answer the following question parts, showing all calculations in each case.
- Calculate the expected annual percentage return of the contemplated portfolio.
- For the above portfolio, calculate the standard deviation.[HINT: See section 7.4 of Brailsford's (2015) text-book.)
- What happens to the portfolio variance in (a) and (b) above when the asset returns are perfectly negatively correlated? Explain carefully.
- With the aid of two hypothetical worked examples, explain hoiow expected utility is a useful criterion for investor choice when the investor payoffs are certain.