You have been asked for your advice in selecting a portfolio of assets and have

Question

You have been asked for your advice in selecting a portfolio of assets and have been given the following data: You have been told that you can create two portfolios-one consisting of assets A and B and the other consisting of assets A and C-by investing equal proportions (50%) in each of the two component assets. What is the expected return for each asset over the 3-year period? What is the expected return for each of the two portfolios? You are further asked to evaluate the individual stock and recommend which stock is best. Which stock would you recommend? Why? Discuss the statement, "do not put all your eggs in one basket".

Explanation / Answer

a) The expected return for each asset over the 3-year period:-

b) The expected return for each of the two portfolios:-

c) Stock A and Stock C both are best. The expected return for each of Stock A and Stock C are increasing over the three year period. Investors always prefer such stocks because of increased returns year-by-year.

Type of asset Expected Return over the 3 year period Asset A (12 + 14 + 16) / 3 = 42 / 3 = 14 % Asset B (16 + 14 + 12) / 3 = 42 / 3 = 14 % Asset C (12 + 14 + 16) / 3 = 42 / 3 = 14 %

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