ST8–1 Portfolio analysis 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.

a. What is the expected return for each asset over the 3-year period?

b. What is the standard deviation for each asset’s return?

c. What is the expected return for each of the two portfolios?

d. How would you characterize the correlations of returns of the two assets making up each of the two portfolios identified in part c?

e. What is the standard deviation for each portfolio?

f. Which portfolio do you recommend? Why?

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Expected return Year Asset A Asset B Asset C 2016 12% 16% 12% 2017 14 14 14 2018 16 12 16