PROBLEM $3$

a$.$ Construct an equal$-$weighted $(50/50)$ portfolio of Investments B and C$.$ What is the realized

rate of return and standard deviation of the portfolio? Explain your results.

b$.$ Construct an equal$-$weighted $(50/50)$ portfolio of Investments C and D$.$ What is the realized

rate of return and standard deviation of the portfolio? Explain your results.

ANSWER

Year B C D BC CD

$1-5\%-25\%15\%-15\mathrm{.}0\%-5\mathrm{.}0\%$

$210\%-5\%10\%2\mathrm{.}5\%2\mathrm{.}5\%$

$320\%15\%10\%17\mathrm{.}5\%12\mathrm{.}5\%$

$430\%35\%15\%32\mathrm{.}5\%25\mathrm{.}0\%$

$540\%55\%25\%47\mathrm{.}5\%40\mathrm{.}0\%$

Rate of return $19\mathrm{.}0\%15\mathrm{.}0\%15\mathrm{.}0\%17\mathrm{.}0\%15\mathrm{.}0\%$ Use AVERAGE Fx

Standard deviation $17\mathrm{.}5\%31\mathrm{.}6\%6\mathrm{.}1\%24\mathrm{.}5\%17\mathrm{.}9\%$ Use STDEV Fx

Correlation coefficient $1\mathrm{.}000\mathrm{.}65$ Use CORREL Fx