7 Coefficient of Variation. Set out below are the returns and their respective probabilities for two assets
Question:
7 Coefficient of Variation. Set out below are the returns and their respective probabilities for two assets A and B.
Asset A Asset B Return Probability Return Probability 10 0.05 9 0.10 11 0.25 12 0.15 12 0.40 13 0.50 13 0.25 15 0.15 14 0.05 16 0.10
(i) Compute the expected return and the risk (standard deviation) for each asset.
(ii) Determine the coefficient of variation (CV) for each asset.
(iii) Comment on your findings in (i) and (ii).
(iv) It has been suggested that these two assets should be combined into a portfolio in the proportions 40 per cent Asset A and 60 per cent Asset B.
Calculate the expected return for this portfolio and its risk (standard deviation), assuming the correlation coefficient to be 0.6.
(v) What are the benefits of combining the two assets into the suggested portfolio?
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