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An investment portfolio is composed of three shares (A, B, and C), which have an expected annual (discrete) return of 3%, 5%, and 10% respectively.
An investment portfolio is composed of three shares (A, B, and C), which have an expected annual (discrete) return of 3%, 5%, and 10% respectively. The corresponding standard deviations are 1%, 2%, and 30%. The correlation in the returns between A and B is 0.1, the correlation between A and C is -0.2, and the correlation between B and C is -0.3. The weights of the three shares are 30%, 60%, and 10% in the portfolio. (i) [2 marks] Using an appropriate statistic to compare the risk-reward trade-off of the three shares. [2 marks] What is the mean of the portfolio return? [4 marks] What is the standard deviation of the portfolio return? (iv) [2 marks] The Board wants to avoid risky option. If only two shares can be used, name your choice and recommend a class of Copula to appropriately model the tail dependency of your chosen shares. Explain your recommendation of Copula
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