Given there are two assets making up a portfolio where each asset has the following characteristics: Asset Expected return 10% Risk (standard deviation) 1 4% 2 16% 11% The correlation between the two assets is -1. (a) Given that the proportion invested in each asset is 50%, compute the expected return of the portfolio. (b) Given that the proportion invested in each asset is 50%, compute the portfolio risk, i.e. standard deviation of the portfolio. (c) Without using a graph paper, scratch a diagram to illustrate the portfolio diversification. Show the portfolio risk for perfect positive correlation and perfect negative correlation.

Given there are two assets making up a portfolio where each asset has the following characteristics: Asset Expected return 10% Risk (standard deviation) 1 4% 2 16% 11% The correlation between the two assets is -1. (a) Given that the proportion invested in each asset is 50%, compute the expected return of the portfolio. (b) Given that the proportion invested in each asset is 50%, compute the portfolio risk, i.e. standard deviation of the portfolio. (c) Without using a graph paper, scratch a diagram to illustrate the portfolio diversification. Show the portfolio risk for perfect positive correlation and perfect negative correlation.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 25P

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