Portfolio AB is formed by investing 50% of the funds in each of the assets A and B. A similar (equally weighted) portfolio has also been created from A and C, called AC. Find the rates of return not given for AB and AC. (Partial answers are given below.) Econ AB= AC= Conditions Probability .50A+.50B .50A+.50C Boom .30 55% 35% Normal .40 ? ? Bust .30 15 ? (For example, the highlighted return of 55% for Portfolio AB under “Boom” is found as follows: .50 x 60% + .50 x 50%. That is, 50% is invested in A, with A having a return of 60% and the remainder (50%) invested in B, with B having a return of 50%, together they give a return of 55% under Boom.) Find the expected return and standard deviation of AB and AC. (The formulas are given in 1 above.) Do you see any evidence of risk reduction from the numbers you obtain? If so, what do you think is the underlying reason for it?
- Portfolio AB is formed by investing 50% of the funds in each of the assets A and B. A similar (equally weighted) portfolio has also been created from A and C, called AC. Find the
rates of return not given for AB and AC. (Partial answers are given below.)
Econ AB= AC=
Conditions Probability .50A+.50B .50A+.50C
Boom .30 55% 35%
Normal .40 ? ?
Bust .30 15 ?
(For example, the highlighted return of 55% for Portfolio AB under “Boom” is found as follows: .50 x 60% + .50 x 50%. That is, 50% is invested in A, with A having a return of 60% and the remainder (50%) invested in B, with B having a return of 50%, together they give a return of 55% under Boom.)
- Find the expected return and standard deviation of AB and AC. (The formulas are given in 1 above.) Do you see any evidence of risk reduction from the numbers you obtain? If so, what do you think is the underlying reason for it?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
