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Investment Homework

Autor:   •  November 16, 2015  •  Term Paper  •  513 Words (3 Pages)  •  840 Views

Page 1 of 3

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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