Increasing the amount of wealth in Asset A whilst maintaining the entire wealth
ID: 2816467 • Letter: I
Question
Increasing the amount of wealth in Asset A whilst maintaining the entire wealth invested in a portfolio consisting of two assets only, A and B (assume that the expected return and standard deviation of both assets are A: 0.10 and 0.03, and B: 0.15 and 0.05, respectively): which one is correct?
a.will increase the expected return of the portfolio.
b. may reduce the variance of the portfolio regardless of the correlation coefficient between Assets A and B.
c. More information is needed before the impact on expected return can be determined.
d. will decrease the expected return of the portfolio, but the expected return will still be greater than if the portfolio consisted of Asset A only.
e. will decrease the expected return of the portfolio, but the expected return will be closer to 15% than before.
Explanation / Answer
d. will decrease the expected return of the portfolio, but the expected return will still be greater than if the portfolio consisted of Asset A only.
Increasing the amount of wealth in Asset A will reduce the expected return, since expected return of A will be less than expected return of B.
But since some of the amount will still be invested in B , the total expected return will still be greater than the portfolio investing fully in asset A.