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Jamie Wong is considering building a portfolio containing two assets, L and M. Asset L will represent 40% of the dollar value of the portfolio, and asset M will account for the other 60%. The expected returns over the next 6 years, 2004–2009, for each of these assets, are shown in the following table.

Year Asset L Asset M
2004 14% 20%
2005 14 18
2006 16 16
2007 17 14
2008 17 12
2009 19 10

 a. Calculate the expected portfolio return.

b. Calculate the standard deviation of expected portfolio returns.

c. Find out covariance and correlation coefficient.

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Related questions

Portfolio analysis:

You have been given the expected return data shown in the first table on three assets -F, G, and H- over the period 2016-2019. Expected return

Asset F

2016 16%,

2017 17%

2018 18%

2019 19%-

Asset G

2016 17%

2017 16%

2018 15%

2019 14%

Asset H

2016 14%

2017 15%

2018 16%

2019 17%

Using these assets, you have isolated the three investment alternatives shown in the following table.

Alternative investments 1- 100% of asset F

Alternative 2 50% of asset F and 50% of asset G

Alternative 3 50% of asset F and 50% of asset H

a. Calculate the expected return over the 4-year period for each of the three alternatives

b. Calculate the standard deviation of returns over the 4-year period for each of the three alternatives

c. Use your findings in parts a and b to calculate the coefficient of variation for each of the three alternatives

d. On the basis of your findings, which of the three investment alternatives do you recommend? why?

Expected Return
Year Asset F Asset G Asset H
2016 16% 17% 14%
2017 17 16 15
2018 18 15 16
2019 19 14 17
Using these assets, you have isolated the three investment
Alternatives shown in the following table
Alternative Investment
1 100% of F
2 50% of f and G
3 50% of f and H
a. calculate the expected return over the 4 year period for all three alternatives
b. calculate the standard deviation of returns ov the 4 year periof for each of the three alternatives
c. Use your finding in part a and b to calculate the coefficient of variation for the three alternatives
d. on the basis of your findings, which of the three investment alternaives do you recommend, why?

1. If we are able to eliminate all of the unsystematic or diversifiable risk in a portfolio then, what is the result?

a.

a risk-free portfolio
b.
a portfolio that has an expected return of zero
c.

a portfolio that contains only systematic risk

2. A portfolio consists 20% of a risk-free asset and 80% of a stock. The risk-free return is 4%. The stock has an expected return of 15% and a standard deviation of 30%. What’s the expected return of the portfolio?

a.
9.5%
b.
15.0%
c.
12.8%

d.
2%


3. The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 1.5, what is its expected return?


a.
12%
b.
19.5%
c.

17%

4. For what value of the correlation coefficient for the returns of a pair of stocks will the benefits of diversification the largest?


a.

1.0
b.

-1.0
c.

0.0
d.

0.5


5. Which of the following is an example of systematic risk?
a.
IBM posts lower than expected earnings.
b.
The overall stock market becomes more risky due to super fasting trading algorithms.
c.

Intel announces record earnings.

6. According to the CAPM (capital asset pricing model), the security market line is a straight line. The intercept of this line should be equal to

a.
zero
b.
the expected risk premium on the market portfolio
c.
the expected return on the market portfolio
d.
the risk-free rate


7. A portfolio has 40% invested in Asset 1, 50% invested in Asset 2 and 10% invested in Asset 3. Asset 1 has a beta of 1.2, Asset 2 has a beta of 0.8 and Asset 3 has a beta of 1.8, what’s the beta of the portfolio?

a.
0.80
b.
1.06
c.
1.27


8. Suppose you can borrow and lend at the risk free-rate of 3%. Which of the following four risky portfolios has the best return relative to risk. (Hint: Calculate Sharpe Ratios the ratio of risk premium to standard deviation for each portfolio)

a.
portfolio with a standard deviation of 15% and an expected return of 12%
b.
portfolio with a standard deviation of 12% and an expected return of 9%
c.
portfolio with a standard deviation of 25% and an expected return of 18%
d.
portfolio with a standard deviation of 19% and an expected return of 15%


9. Which statements are TRUE regarding risk and return?

Statement I:
Diversification is the process of removing systematic risk from a portfolio.
Statement II:
In general, the greater the risk, the greater the return required by an investor.
Statement III:
Investors should focus on real returns if they are concerned about the purchasing power of their wealth.


a.
Statements II and III only
b.
Statement I only
c.
Statements I and III only
d.
Statements I and II only

10. The beta of the risk-free asset is:
a.

1.0
b.

0.5
c.

0.0
d.

-1.0

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