Investment Homework
Autor: zalakt • November 16, 2015 • Term Paper • 513 Words (3 Pages) • 771 Views
Part 1:
Question 1)
a) E(R) Volatility Weight
Large-Cap Stocks 15% 15% 75%
Government Bonds 5% 10% 25%
Correlation: 0.5
To calculate Expected return, we took the sum of all of the weights multiplied by their respective expected returns. (.15*.75)+(.05*.25) = 12.5%
To calculate the volatility of the portfolio, we used the formula as prescribed in the lecture. Each weight squared multiplied by their variance, plus 2 times each weight times each standard deviation times the correlation. ((.752)*(.152))+ ((.252)*(.102))+2*.5*.15*.10*.75*.25 = 12.69%
Expected Return | Volatility |
12.50% | 12.69% |
b)
Weight Stocks | E(Rp) | Volatility (p) |
0% | 5% | 10% |
10% | 6% | 10%[pic 1] |
20% | 7% | 10% |
30% | 8% | 10% |
40% | 9% | 10% |
50% | 10% | 11% |
60% | 11% | 12% |
70% | 12% | 12% |
80% | 13% | 13% |
90% | 14% | 14% |
100% | 15% | 15% |
c) As the correlation decreases, the curve becomes more and more convex. When the correlation is -1.0, the curve becomes two lines, touching the y axis. This indicates that it is possible to achieve this return without risk. This return is the risk-free weight.
[pic 2]
[pic 3]
[pic 4]
[pic 5]
When the correlation is 1, the line becomes straight, as both securities behave the same way.
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