Problem - Portfolio Mathematics Please show how you got your answer and your rea
ID: 2642076 • Letter: P
Question
Problem - Portfolio Mathematics
Please show how you got your answer and your reasoning.
A) What is the portfolio expected return for each of the following combinations:
Portfolio A: W1 = W2 = .5; and Portfolio B: W1 = .75, and W3 = .25.
B) What are the variances and standard deviations for each portfolio as in Part A?
C) Which of the two porfolios would yo choose? Why?
Problem - Portfolio Mathematics Please show how you got your answer and your reasoning. Consider the following expected return, variance and correlation values for the three securities listed below: (CFA Exam) A) What is the portfolio expected return for each of the following combinations: Portfolio A: W1 = W2 = .5; and Portfolio B: W1 = .75, and W3 = .25. B) What are the variances and standard deviations for each portfolio as in Part A? C) Which of the two porfolios would yo choose? Why?Explanation / Answer
(A) The expected return of the portfolio is the weighted average of the returns of the components of the portfolios:
Portfolio A
ERp = w1(r1) + w2(r2) + w3(r3)
Portfolio A
ERp = 0.5*.08 + 0.5* .10 + 0* 0.12 = .04 + 0.05 + 0 = 0.09= 9%
Portfolio B
ERp = 0.75*.08 + 0* .10 + 0.25* 0.12 = .06 + 0 + 0.03 = 0.09 = 9%
(B) The variance of a portfolio is given by the following equation:
?2 p = w2 1(?2 1) + w2 2(?2 2)+ w2 3(?2 3)+ 2 w1w2w3?1?2?3?12
Portfolio A
?2 p= (0.5)2 * (0.05)2 + (0.5)2 * (.10)2 + (0) * (.15)2 + 2 (.5* .5*0) (.05* .10* .15)* .80
= .25* .0025 + .025* .01 + 0 + 0= 0.00125 + .0025= .00375
?p= 6.12%
Portfolio B
?2 p= (0.75)2 * (0.05)2 + (0)2 * (.10)2 + (0.25)2 * (.15)2 + 2 (.75* 0 *0.25) (.05* .10* .15)* .80
= .5625* .0025 + 0 + 0.0625 * 0.0225 + 0= 0.00141 + .00141= .00281625
?p= 5.31%
(C) Portfolio B should be chosen with least ?.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.