Consider the data on the follow two pairs of securities (A and B) and (X and Z).
Question:
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:
- Which portfolios will have the lower return variance? Circle one and explain.
Portfolio 1 Portfolio 2 Both will be the same
- Which portfolio with have the largest expected return? Circle one and explain.
Portfolio 1 Portfolio 2 Both will be the same
- Which portfolio will have the largest Sharpe ratio? Circle one and explain.
Portfolio 1 Portfolio 2 Both will be the same
Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow