Question
You are given the following information on 2 assets A and B: asset A has an expected return of 20% and standard deviation of 30%;
You are given the following information on 2 assets A and B: asset A has an expected return of 20% and standard deviation of 30%; asset B has an expected return of 12% and standard deviation of 15%; correlation between the two assets is 0.1. a) Explain why an investor may consider asset A as a more risky asset? Also, suggest how an investor may rank his choice between investing in asset A or B. (4 marks) b) An investor decides to create a portfolio by putting half of his money in asset A and the other half of his money in asset B. (i) What is the expected return of this portfolio? Show you workings. (5 marks) (ii) What is the standard deviation of this portfolio? Show you workings. (5 marks) c) An investment advisor decides to create a minimum variance portfolio using assets A and B. For the minimum variance portfolio: (i) Calculate the weights of the assets in the portfolio. Show your workings. (8 marks) (ii) Calculate the expected return of the portfolio. Show your workings. (3 marks) (iii) Calculate the standard deviation of the portfolio. Show your workings. (6 marks) (iv) How does the minimum variance portfolios expected return compare to your previous portfolios expected return? What does this tell you in terms of return and risk?
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