Portfolio Mean and Variance: Consider a portfolio that consists of two assets: A and B, with returns
Question:
Portfolio Mean and Variance: Consider a portfolio that consists of two assets: A and B, with returns RA and RB, correspondingly. Return on asset A has a mean 10% and a standard deviation 5%. Return on asset B has a mean 15% and a standard deviation 10%. Assume that 50% is invested in each asset, so that the return RP on this portfolio is RP = .5RA + .5RB
(a) Which one is the riskier asset: A or B? Which asset has higher expected return?
(b) Assume that Corr(RA;RB) = 0. Calculate the mean and the variance of the return to this portfolio.
(c) Assume that Corr(RA;RB) = -0.2. Calculate the mean and the variance of the return to this portfolio.
(d) Assume now that Corr(RA;RB) = 0.2. Calculate the mean and the variance of the return to this portfolio.
(e) Between (b),(c) and (d): which situation would you prefer, and why?
Management Science The Art of Modeling with Spreadsheets
ISBN: 978-1118582695
4th edition
Authors: Stephen G. Powell, Kenneth R. Baker