Portfolio Mean and Variance: Consider a portfolio that consists of two assets: A and B, with returns RA and RB, correspondingly. Return on asset A has a mean 10% and a standard deviation 5%. Return on asset B has a mean 15% and a standard deviation 10%. Assume that 50% is invested in each asset, so that the return RP on this portfolio is RP = .5RA + .5RB

(a) Which one is the riskier asset: A or B? Which asset has higher expected return?

(b) Assume that Corr(RA;RB) = 0. Calculate the mean and the variance of the return to this portfolio.

(c) Assume that Corr(RA;RB) = -0.2. Calculate the mean and the variance of the return to this portfolio.

(d) Assume now that Corr(RA;RB) = 0.2. Calculate the mean and the variance of the return to this portfolio.

(e) Between (b),(c) and (d): which situation would you prefer, and why?

Answer rating: 100% (QA)

a Asset A has a lower expected return and a lower standard deviation while asset B has a higher expe... View the full answer