(a) What is meant by the term correlation? What is meant by the term diversification? (b) Suppose that you are considering adding Real Estate investments to a portfolio of US equities. The following data is available to you: US Equities Real Estate Average annual return (% p.a) Standard deviation (% p.a.) 9.26% 8.44% 17.38% 8.67% You are also told that the correlation of returns to US Equities and Real Estate is 0.23. (b) (i) Suppose you form a portfolio with a weight of 80% on US Equities and 20% on Real Estate. Using your knowledge from Business Finance, compute the expected return and standard deviation to this portfolio. (b) (ii) Repeat the calculation in (b)(i) above but this time assume the correlation between US Equities and Real Estate is 0.93. (b) (iii) Comment on your results.
(a) What is meant by the term correlation? What is meant by the term diversification? (b) Suppose that you are considering adding Real Estate investments to a portfolio of US equities. The following data is available to you: US Equities Real Estate Average annual return (% p.a) Standard deviation (% p.a.) 9.26% 8.44% 17.38% 8.67% You are also told that the correlation of returns to US Equities and Real Estate is 0.23. (b) (i) Suppose you form a portfolio with a weight of 80% on US Equities and 20% on Real Estate. Using your knowledge from Business Finance, compute the expected return and standard deviation to this portfolio. (b) (ii) Repeat the calculation in (b)(i) above but this time assume the correlation between US Equities and Real Estate is 0.93. (b) (iii) Comment on your results.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Q2. part b) all parts.
Transcribed Image Text:Question 2:
(a) What is meant by the term correlation? What is meant by the term diversification?
(b) Suppose that you are considering adding Real Estate investments to a portfolio of US
equities. The following data is available to you:
US Equities
Real Estate
Average annual return (%
p.a)
Standard deviation (% p.a.)
9.26%
8.44%
17.38%
8.67%
You are also told that the correlation of returns to US Equities and Real Estate is 0.23.
(b) (i) Suppose you form a portfolio with a weight of 80% on US Equities and 20% on Real
Estate. Using your knowledge from Business Finance, compute the expected return and
standard deviation to this portfolio.
(b) (ii) Repeat the calculation in (b)(i) above but this time assume the correlation between US
Equities and Real Estate is 0.93.
(b) (iii) Comment on your results.
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