Consider the following portfolio: Instructions: 1. Determine the expected return
ID: 2748576 • Letter: C
Question
Consider the following portfolio:
Instructions:
1. Determine the expected return of the portfolio if you want to distribute your investment at 30% A, 40% B and 30% in C.
2. Determine the standard deviation of the portfolio.
3. Determine the expected return of the portfolio if you want to distribute your investment at 35% A, 25% B and 40% in C.
4. Determine the standard deviation of the portfolio.
5. Identify the distribution of investment that provides increased performance and a lower standard deviation.
Financial instrument Expected return Standard deviation A 15% 3% B 25% 12% C 9% 3%Explanation / Answer
1. Determine the expected return of the portfolio if you want to distribute your investment at 30% A, 40% B and 30% in C.
Expected return of the portfolio = Weight of Stock A * Expected Return of Stock A + Weight of Stock B * Expected Return of Stock B + Weight of Stock C * Expected Return of Stock C
Expected return of the portfolio = 30%*15 + 40%*25 + 30%*9
Expected return of the portfolio = 17.20%
2. Determine the standard deviation of the portfolio.
Assuming correlation among each stock is equal to 1
standard deviation of the portfolio = Weight of Stock A * standard deviation of Stock A + Weight of Stock B * standard deviation of Stock B + Weight of Stock C * standard deviation of Stock C
standard deviation of the portfolio = 30%*3 + 40%*12 + 30%*3
standard deviation of the portfolio = 6.60%
3. Determine the expected return of the portfolio if you want to distribute your investment at 35% A, 25% B and 40% in C.
Expected return of the portfolio = Weight of Stock A * Expected Return of Stock A + Weight of Stock B * Expected Return of Stock B + Weight of Stock C * Expected Return of Stock C
Expected return of the portfolio = 35%*15 + 25%*25 + 40%*9
Expected return of the portfolio = 15.10%
4. Determine the standard deviation of the portfolio.
standard deviation of the portfolio = Weight of Stock A * standard deviation of Stock A + Weight of Stock B * standard deviation of Stock B + Weight of Stock C * standard deviation of Stock C
standard deviation of the portfolio = 35%*3 + 25%*12 + 40%*3
standard deviation of the portfolio = 5.25%
5. Identify the distribution of investment that provides increased performance and a lower standard deviation.
Distribution of investment that provides increased performance and a lower standard deviation by investing in stock A instead of Stock C which would increase performance and lower the standard deviation