Problem 2 Below is a table with the expected return of three active - A, B and C
ID: 2718262 • Letter: P
Question
Problem 2
Below is a table with the expected return of three active - A, B and C - for the period from 2017 to 2020.
For these assets should evaluate the following:
Alternative 1 - Invest 100% in active A.
Alternative 2 - Investing in assets 50% A and 50% in the active B.
Alternative 3 - 50% invest in asset A and 50% in active C.
Instructions:
1. Calculate the expected return for four years for each of the three alternatives.
2. Calculate the standard deviation for four years for each of the three alternatives.
3. Use the results of the first two parts to calculate variation coefficient for each of the three alternatives.
4. Which of the three investment alternatives you recommend? Why?
Explanation / Answer
1.
Calculate the expected return for four years for each allternatives:
Alternative 1:
Invest 100% in A
14%, 15%, 20% and 21% are expected return for years respectively.
Alternative 2:
Investing in assets 50% A and 50% in the active B.
Returns if ivested 50% in A: 7%, 7.5%, 10% and 10.5% are expected return for years respectively.
Returns if ivested 50% in B:6.5%, 8.5%, 6% and 9% are expected return for years respectively.
Total returns : 13.5%, 16%, 16% and 19.5% are expected return for years respectively.
Alternative 3 -
50% invest in asset A and 50% in active C.
Returns if ivested 50% in A: 7%, 7.5%, 10% and 10.5% are expected return for years respectively.
Returns if ivested 50% in C: 6%, 6%, 7.5% and 8.5% are expected return for years respectively.
Total returns : 13%, 13.5%, 17.5% and 19% are expected return for years respectively.
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