Question
You are provided with the following sample observations relating to historical rate of returns and their corresponding probabilities for individual assets, Brad and Ford: Brad
You are provided with the following sample observations relating to historical rate of returns and their corresponding probabilities for individual assets, Brad and Ford: Brad Ford Obs E(RB) Prob 1 -0.03 0.01 2 0.07 0.09 3 0.10 0.10 4 0.11 0.20 5 0.02 0.05 6 0.15 0.25 7 0.08 0.05 8 0.09 0.10 9 0.12 0.10 10 0.05 0.05 Obs E(RF) Prob 1 -0.01 0.01 2 0.10 0.09 3 0.15 0.10 4 0.20 0.20 5 0.08 0.05 6 0.25 0.25 7 0.13 0.05 8 0.09 0.10 9 0.11 0.10 10 0.06 0.05 Required: Based on the following information (Note: You can use Microsoft Excel functions to expedite your calculations. Please show answers up to two digits after decimal point): a) Calculate the expected rate of return for each individual asset. (4 marks) b) Calculate the standard deviation of returns for each individual asset. (4 marks) c) Assume that the correlation coefficient between the two assets is -1 (perfectly negatively correlated). Calculate the weighted average rate of returns and standard deviation of returns for the hypothetical portfolios containing the combination of the two assets in varying weights as indicated below. Then, choose a recommended portfolio. Summarize your answers in the following table. For example, for Brad Ford portfolio:
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