Consider the data on the follow two pairs of securities (A and B) and (X and Z).

Security                             Expected Return              Standard Deviation        

     A                                                  .10                                      .20

     B                                                  .20                                      .20

     X                                                  .10                                      .20

     Z                                                   .20                                      .20

The correlation between the returns on A and B is .6, while the correlation between the returns on X and Z is zero.

Consider two portfolios:              Portfolio 1: 50% in A and 50% in B

                                                          Portfolio 2: 50% in X and 50% in Z.

Questions:

1. Which portfolios will have the lower return variance? Circle one and explain.

              Portfolio 1                        Portfolio 2                        Both will be the same

2. Which portfolio with have the largest expected return? Circle one and explain.

              Portfolio 1                        Portfolio 2                        Both will be the same

3. Which portfolio will have the largest Sharpe ratio? Circle one and explain.

              Portfolio 1                        Portfolio 2                        Both will be the same

Answer rating: 100% (QA)

ANSWER Lets analyze each question Which portfolio will have the lower return variance Portfolio 1 co... View the full answer