The formula for the standard deviation of a portfolio, consisting of 3 assets is given below....
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The formula for the standard deviation of a portfolio, consisting of 3 assets is given below. Note that the subscripts denote assets, in this case Asset A, B, or C, and that is the variance of the expected return to asset A, while is the covariance between the expected return of asset A and asset B. Finally, the weight or share of asset A in the portfolio is given by WA 0 = [w0 + w0 + w0 + 2WWBOAB + 2WWcOC + 2 W&W CO BC ] You have the following information on three assets. The values are all in percentages, which work in the formula above. [For example 62-100 and you can plug 100 into the equation. If you use decimal form which is harder but works, be sure to convert back to percentage for your final answer.] Correction: You should convert to rate first! (My apologies!): In the formula use = 0.04 and o=4. This will give , as a rate. Then multiply by 100 to get as %. Expected return Variance Covariance with A Covariance with B Covariance with C Asset A 6 100 0 0 t B 4 4 0 0 sset C 8 400 AC = 81 OBC = 0 -- You hold a portfolio consisting of an equal share of all three assets which has the expected return of 6% and the standard deviation of approximately 8.6%. You are considering dropping Asset A from your portfolio and moving to a portfolio consisting of half each of asset B and C. A. (10) Compute the expected return and standard deviation of the new portfolio consisting of Asset B and Asset C. B. Using the logic of the efficient frontier and the appropriate calculations, explain whether this portfolio shift is a good idea for a rational investor like yourself. The formula for the standard deviation of a portfolio, consisting of 3 assets is given below. Note that the subscripts denote assets, in this case Asset A, B, or C, and that is the variance of the expected return to asset A, while is the covariance between the expected return of asset A and asset B. Finally, the weight or share of asset A in the portfolio is given by WA 0 = [w0 + w0 + w0 + 2WWBOAB + 2WWcOC + 2 W&W CO BC ] You have the following information on three assets. The values are all in percentages, which work in the formula above. [For example 62-100 and you can plug 100 into the equation. If you use decimal form which is harder but works, be sure to convert back to percentage for your final answer.] Correction: You should convert to rate first! (My apologies!): In the formula use = 0.04 and o=4. This will give , as a rate. Then multiply by 100 to get as %. Expected return Variance Covariance with A Covariance with B Covariance with C Asset A 6 100 0 0 t B 4 4 0 0 sset C 8 400 AC = 81 OBC = 0 -- You hold a portfolio consisting of an equal share of all three assets which has the expected return of 6% and the standard deviation of approximately 8.6%. You are considering dropping Asset A from your portfolio and moving to a portfolio consisting of half each of asset B and C. A. (10) Compute the expected return and standard deviation of the new portfolio consisting of Asset B and Asset C. B. Using the logic of the efficient frontier and the appropriate calculations, explain whether this portfolio shift is a good idea for a rational investor like yourself.
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Related Book For
Corporate Finance
ISBN: 978-0077861759
11th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
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