Fnce
Assignment 4 is worth 5% of your final mark. Complete and submit Assignment 4 after you complete Lesson 12.
There are 12 questions in this assignment. The breakdown of marks for each question is presented in the table below. Please show all your work as this will help the marker give you part marks as well as serve as a good study aid as you prepare for the Final Examination.
Question  Marks Available  Reference  1  5  Lesson 10  2  5  Lesson 10  3  5  Lesson 10  4  5  Lesson 10  5  10  Lesson 11  6  15  Lesson 11  7  10  Lesson 11  8  10  Lesson 11  9  5  Lesson 12  10  10  Lesson 12  11  10  Lesson 12  12  10  Lesson 12  Total  100  
1. Explain the …show more content…
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.
Portfolio Expected Return = A*r(a) + B*r(b)
Portfolio Expected Return = 25%*0.17 + 75%*0.13 = 0.0425+0.0975 = 0.14 =14%
Standard Deviation (SD) = sqrt( Variance) = Sqrt(V)
SD (A) = Sqrt (0.0169) = 0.13
SD(B) = sqrt(0.0361) = 0.19
Correlation(a,b) = Covariance(a,b) / ( St.Dev.(a)* St.Dev.(b) )
Covariance(a,b) = Correlation(a,b) *( St.Dev.(a)* St.Dev.(b) ) = 0.4*0.13*0.19 = 0.00988
Variance(a,b) = sq(A)*var(a) + sq(B)*var(b) + 2*A*B*cv(a,b) = sqrt(25%)*0.17 + sqrt(75%)*0.13+2*25%*75%*0.00988 ie Var(a,b) = 0.085+0.1126+0.0037 = 0.2013
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?
Portfolio Expected Return = 78%*0.17 + 22%*0.13 = 0.1326+0.0286 = 0.1612=16.12%
Variance(a,b) = sq(A)*var(a) + sq(B)*var(b) + 2*A*B*cv(a,b) = sqrt(78%)*0.17+sqrt(22%)*0.13+2*78%*22%*0.00988
= 0.15+0.061+0.0034 = 0.2144
Yes. This Portfolio is superior to the one in (a).

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