Below are the returns for two assets; State of naturer1r2probabilityWeak growth15%15%1/3 Strong growth 30% 12 1/3 Very strong growth 45% 9 1/3 Expected returns 30% 12 total 1.0 Calculate the two variances and Cov (r1, r2). If assets 1 and 2 are combined 50-50 into a portfolio, what is the variance of this portfolio? Show your calculations.

Risk is measured via Variance, that is Standard Deviation square. Variance is the average of the…

Answered: two variances and Cov (r1, r2). If…

two variances and Cov (r1, r2). If assets 1 and 2 are combined 50-50 into a portfolio, what is the variance of this portfolio

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 18P

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Concept explainers

Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.

Question

Below are the returns for two assets;

State of nature

probability

Weak growth

15%

1/3

Strong growth

30%

1/3

Very strong growth

45%

1/3

Expected returns

30%

total 1.0

Calculate the two variances and Cov (r1, r2). If assets 1 and 2 are combined 50-50 into a portfolio, what is the variance of this portfolio? Show your calculations.

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