The table below provides the returns of assets A and B under all possible states of...

Transcribed Image Text:

The table below provides the returns of assets A and B under all possible states of the economy. Probability 0.25 0.50 0.25 Asset A -0.02 0.00 0.06 Asset B -0.06 0.05 0.02 (a) Calculate the expected return and standard deviation of each asset and also the correlation between the returns of these two assets. (b) Find the weights of the portfolio that is composed of assets A and B and that has the minimum variance. Calculate the expected return and standard deviation of the minimum variance portfolio. (c) Discuss how the benefits of portfolio diversification depend on correlations between assets. The table below provides the returns of assets A and B under all possible states of the economy. Probability 0.25 0.50 0.25 Asset A -0.02 0.00 0.06 Asset B -0.06 0.05 0.02 (a) Calculate the expected return and standard deviation of each asset and also the correlation between the returns of these two assets. (b) Find the weights of the portfolio that is composed of assets A and B and that has the minimum variance. Calculate the expected return and standard deviation of the minimum variance portfolio. (c) Discuss how the benefits of portfolio diversification depend on correlations between assets.

Answer rating: 100% (QA)

To solve this problem we can use the following steps a Calculate the expected return and standard deviation of each asset and the correlation between the returns of the two assets 1 Calculate the expe... View the full answer