Question
The following tables contain information about three assets, A, B and C. Standard deviation(%) Beta Expected return (%) Asset A 30 0.8 12 Asset B
The following tables contain information about three assets, A, B
and C.
Standard deviation(%) Beta Expected return (%)
Asset A 30 0.8 12
Asset B 10 1.8 10
Asset C 15 1.2 8
Correlation
of returns Asset A Asset B Asset C
Asset A 1
Asset B 0.5 1
Asset C 0.1 -0.5 1
Required:
(i) Compare Assets A and B. Which asset has greater total risk?
Which has greater systematic risk? Which has greater
unsystematic risk? Which asset has a higher risk premium?
(ii) A portfolio is constructed with 40% invested in A, 60% in B.
What is the portfolio's Beta? What is the standard deviation
of the portfolio?
(iii) Assume you want to construct an equally-weighted portfolio
with only two assets and you want the portfolio to have the
MINIMUM risk, which two assets should you include into the
portfolio? and what is the portfolio's risk?
(iv) Portfolio A is an equally-weighted portfolio with Asset A and
B; Portfolio B is an equally-weighted portfolio with Asset A, B
and C. which portfolio has smaller standard deviation?
(v) If the risk free rate of interest is 4%, what are the Sharpe ratios
of Asset A and B. Compare the two assets' performance
based on their Sharpe ratios.
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