Consider two assets, A and B. A earns +4%, -5%, or +3%, in scenarios 1, 2, and 3. B earns -5%, +3%, or +4%, in scenarios 1, 2, and 3. Each scenario is equally likely. Compute the expected rates of return and SD for each asset, A and B. Now, consider a portfolio of assets A and B called AB, where the investor holds fraction 59% of his portfolio in A and fraction (1-59%) in B. Compute the standard deviation of AB. Compare the new standard deviation to that of each asset's individual standard deviation. What was the change in standard deviation between asset A and portfolio AB? StDev(AB) - StDev(A). Report answer to the four decimal place.
Consider two assets, A and B. A earns +4%, -5%, or +3%, in scenarios 1, 2, and 3. B earns -5%, +3%, or +4%, in scenarios 1, 2, and 3. Each scenario is equally likely. Compute the expected rates of return and SD for each asset, A and B. Now, consider a portfolio of assets A and B called AB, where the investor holds fraction 59% of his portfolio in A and fraction (1-59%) in B. Compute the standard deviation of AB. Compare the new standard deviation to that of each asset's individual standard deviation. What was the change in standard deviation between asset A and portfolio AB? StDev(AB) - StDev(A). Report answer to the four decimal place.
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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Consider two assets, A and B. A earns +4%, -5%, or +3%, in scenarios 1, 2, and 3. B earns -5%, +3%, or +4%, in scenarios 1, 2, and 3. Each scenario is equally likely. Compute the expected
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