The two assets, X and Y, whose returns are shown in the multivariate distribution to the right,
Question:
The two assets, X and Y, whose returns are shown in the multivariate distribution to the right, have the following expected returns, variances, covariance, and correlation: mX = 13.00%; mY = 12.50%; sX = 3.317%; sY = 2.500%; Cov(X,Y) = -.0004; rXY = -.45.
Y1 | Y2 | P(X=xi) | ||
10% | 15% | |||
X1 | 5% | .1 | 0 | .1 |
X2 | 10% | 0 | .2 | .2 |
X3 | 15% | .4 | .3 | .7 |
P(Y=yi) | .5 | .5 |
a. What is the expected return of a portfolio that is 50% Asset X and 50% Asset Y?
What is the standard deviation of a portfolio that is 50% Asset X and 50% Asset Y?
b. What is the expected return of a portfolio that is 75% Asset X and 25% Asset Y?
What is the standard deviation of a portfolio that is 75% Asset X and 25% Asset Y?
c. Which of the preceding portfolios ((a) or (b)) is better? Why?
Corporate Finance
ISBN: 9781265533199
13th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe