Two assets are the constituents of a market capitalization-weighted index. They offer the following returns in...
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Two assets are the constituents of a market capitalization-weighted index. They offer the following returns in various states of the world: State 1 2 3 4 Probability 0.3 0.4 0.1 0.2 i. Asset 1 5% 2% 4% 3% Asset 2 6% 1% 4% 4% a) If Asset 1 has a market capitalization of $400 million and Asset 2 has a market capitalization of $600 million, calculate the expected return of the index ii. the standard deviation of the return of the index b) You now decide to construct a portfolio consisting of a weight of 0.7 in the index from part a) plus 0.3 in gold. Gold has an expected return of 1% and a standard deviation of return of 2%. The correlation between the returns of the index and the returns of gold is -0.2. Use matrix multiplication to find the expected return and standard deviation of your portfolio returns. c) Comment on the role that gold is playing in the portfolio in part b). Two assets are the constituents of a market capitalization-weighted index. They offer the following returns in various states of the world: State 1 2 3 4 Probability 0.3 0.4 0.1 0.2 i. Asset 1 5% 2% 4% 3% Asset 2 6% 1% 4% 4% a) If Asset 1 has a market capitalization of $400 million and Asset 2 has a market capitalization of $600 million, calculate the expected return of the index ii. the standard deviation of the return of the index b) You now decide to construct a portfolio consisting of a weight of 0.7 in the index from part a) plus 0.3 in gold. Gold has an expected return of 1% and a standard deviation of return of 2%. The correlation between the returns of the index and the returns of gold is -0.2. Use matrix multiplication to find the expected return and standard deviation of your portfolio returns. c) Comment on the role that gold is playing in the portfolio in part b).
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SOLUTION a i The expected return of the index can be calculated as the weighted average of the expected returns of the two assets based on their marke... View the full answer
Related Book For
Business Statistics For Contemporary Decision Making
ISBN: 978-1118749647
8th edition
Authors: Black Ken
Posted Date:
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