FNCE 370v8 Assignment 4-6

QUESTION

FNCE 370v8 Assignment 4-6

The expected returns, return variances, and the correlation between the
returns of four securities are shown below.

Security

Expected Return

Variance of Returns

Correlation

A

B

C

D

A

0.17

0.0169

1

0.4

0.7

0.2

B

0.13

0.0361

1

0.6

0.5

C

0.09

0.0049

1

0.9

D

0.07

0.005

1

a. Determine the expected return and variance for a portfolio composed
of 25% of security A and 75% of security B.
b. Determine the expected return and variance of a portfolio that
contains 78% security A and 22% security B. Is this portfolio superior to that
one in (a) above?
c. Calculate the expected return and variance of a portfolio that
contains 60% security C and 40% security D.
d. If an investor were to select among the following three portfolios,
which one would he or she prefer?
o An equally-weighted portfolio of securities A, B, and C.
o An equally-weighted portfolio of A, B, and D.
o An equally-weighted portfolio of B, C, and D.
e. If a risk-adverse investor desires to hold a portfolio of only two
securities and expects a return of 11%, what would you advise the investor to
do?

ANSWER:

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