Portfolio analysis You have been given the expected return data shown in the fir
ID: 2383265 • Letter: P
Question
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
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 asset F
2 50% of asset F and 50% of asset G
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?
Explanation / Answer
a. The expected return(ER) over the 4-year period for each of the three alternatives 1. 100% of Asset F Year Asset F 2016 16% 2017 17% 2018 18% 2019 19% Total 70% ER 70%/4 0.175 ie.17.5% 2. 50% of asset F and 50% of asset G Year Asset F Wt. Exp.Ret. Asset G Wt. Exp.Ret. Total Exp.Ret. 2016 0.16 0.5 0.08 0.17 0.5 0.085 0.165 2017 0.17 0.5 0.085 0.16 0.5 0.08 0.165 2018 0.18 0.5 0.09 0.15 0.5 0.075 0.165 2019 0.19 0.5 0.095 0.14 0.5 0.07 0.165 Sum 0.66 Expected return over the 4 year period 0.66/4 0.165 ie. 16.5% 3. 50% of asset F and 50% of asset H Year Asset F Wt. Exp.Ret. Asset H Wt. Exp.Ret. Total Exp.Ret. 2016 0.16 0.5 0.08 0.14 0.5 0.07 0.15 2017 0.17 0.5 0.085 0.15 0.5 0.075 0.16 2018 0.18 0.5 0.09 0.16 0.5 0.08 0.17 2019 0.19 0.5 0.095 0.17 0.5 0.085 0.18 Sum 0.66 Expected return over the 4 year period 0.66/4 0.165 ie. 16.5% b. The standard deviation of returns over the 4-year period for each of the three alternatives 1. 100% of Asset F Year Asset F Deviation from the mean(0.175) Dev.^2 2016 0.16 -0.015 0.000225 2017 0.17 -0.005 2.5E-05 2018 0.18 0.005 0.000025 2019 0.19 0.015 0.000225 Sum 0.0005 Variance=Sum Dev.^2 / (No,of observations -1) ie. 0.0005/ (4-1)= 0.000167 Std.deviation= Sq.root of variance ie. Sq.rt. Of 0.000166667 0.01291 ie.1.29% 2. 50% of asset F and 50% of asset G Year Asset F Dev. From mean(0.165) Dev.^2 Asset G Dev. From mean(0.165) Dev.^2 Total Dev.^2 2016 0.16 -0.005 0.000025 0.17 0.005 0.000025 5E-05 2017 0.17 0.005 0.000025 0.16 -0.005 0.000025 5E-05 2018 0.18 0.015 0.000225 0.15 -0.015 0.000225 0.00045 2019 0.19 0.025 0.000625 0.14 -0.025 0.000625 0.00125 Sum Dev.^2 0.0018 variance 0.0018 Std.deviation 0.04242641 ie. 4.25% 3. 50% of asset F and 50% of asset H Year Asset F Dev. From mean(0.165) Dev.^2 Asset H Dev. From mean(0.165) Dev.^2 Total Dev.^2 2016 0.16 -0.005 0.000025 0.14 -0.025 0.000625 0.00065 2017 0.17 0.005 0.000025 0.15 -0.015 0.000225 0.00025 2018 0.18 0.015 0.000225 0.16 -0.005 0.000025 0.00025 2019 0.19 0.025 0.000625 0.17 0.005 0.000025 0.00065 Sum Dev.^2 0.0018 variance 0.0018 Std.deviation 0.04242641 ie. 4.25% c. The coefficient of variation for each of the three alternatives Coefficient of variation = Std.deviation/ Mean expected return 1. 100% of Asset F 0.0129/0.175 = 0.073714 2. 50% of asset F and 50% of asset G 0.0425/0.165 = 0.257576 3. 50% of asset F and 50% of asset H 0.0425/0.165 = 0.257576 d. Alternative 1 -ie. 100% Asset F- is recommended as it has the least Coefficient of variation.ie. Least riskier than 2 nd & 3rd alternatives (which rank equally)