Question: Consider two assets, A and B . A earns + 4 % , 5 % , or + 3 % , in scenarios 1 ,

Consider two assets, A and B

.

A earns

+ 4 %, 5 %,

+ 3 %,

in scenarios

1, 2,

and

3 .

B earns

5 %, + 3 %,

+ 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

90 %

of his portfolio in A and fraction

(1 - 90 %)

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

(

) -

StDev

(

)

Round to the

4

th decimal place!!!!!!

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