LYCEUM OF THE PHILIPPINES UNIVERSITY

BUSINESS ECONOMICS AND FINANCE

QUIZ- RISKS AND RETURNS IN A PROTFOLIO

NAME__________________________________ SECTION________ SCORE_____

GRADE_____

Instructions: 1 No borrowing of pencils, erasers and calculators. 2 All cellular phones are
not allowed 3 No talking or looking at your seatmates.

Portfolio analysis You have been given the expected return data shown in the first table on
three assets—F, G, and H—over the period 2013–2016.
Expected Return
Year Asset F Asset G Asset H
2013 16% 17% 14%
2014 17% 16% 15%
2015 18% 15% 16%
2016 19% 14% 17%

Using these assets, you have isolated the three investment alternatives shown in the
following table.
Alternative Investment
1 100% of asset F
2 50% of asset F and 50% of asset G
3 50% of asset F and 50% of asset H

Requirements: Write your answers in the space provided. Round answers to two decimal
places. All answers must be supported by computation in good form. Take care because I
care😊

a. Calculate the expected return over the 4-year period for each of the three alternatives.
Alternative Expected Return
1 17.5%
2 16.5%
3 16.5%

b. Calculate the standard deviation of returns over the 4-year period for each of the three
alternatives.
Alternative Standard Deviation
1 1.291%
2 0%
3 1.291

c. Use your findings in parts a and b to calculate the coefficient of variation for each of the
three
alternatives.
Alternative Coefficient of Variation
1 0.0738
2 0
3 0.0782
d. On the basis of your findings, which of the three investment alternatives do you
recommend? Why?
Recommended Alternative Why?

2 Since the assets have different

expected returns, the coefficient
of variation should be used to
determine the best portfolio.
Alternative 3, with positively
correlated assets, has the
highest coefficient of variation
and therefore is the riskiest.
Alternative 2 is the best choice; it
is perfectly negatively correlated
and therefore has the lowest
coefficient of variation.
(a) Expected portfolio return:
Alternative 1: 100% Asset F
16%  17%  18%  19%
kp   17.5%
4
Alternative 2: 50% Asset F  50% Asset G
Asset F Asset G Portfolio Return
Year (wFkF)  (wGkG) kp
2007 (16%0.50  8.0%)  (17%0.50  8.5%)  16.5%
2008 (17%0.50  8.5%)  (16%0.50  8.0%)  16.5%
2009 (18%0.50  9.0%)  (15%0.50  7.5%)  16.5%
2010 (19%0.50  9.5%)  (14%0.50  7.0%)  16.5%
66
kp   16.5%
4
Alternative 3: 50% Asset F  50% Asset H
Asset F Asset H Portfolio Return
Year (wFkF)  (wHkH) kp
2007 (16%0.50  8.0%)  (14%0.50  7.0%) 15.0%
2008 (17%0.50  8.5%)  (15%0.50  7.5%) 16.0%
2009 (18%0.50  9.0%)  (16%0.50  8.0%) 17.0%
2010 (19%0.50  9.5%)  (17%0.50  8.5%) 18.0%

66
kp   16.5%
4
n
(ki  k)2
(b) Standard Deviation: kp  
i 1 (n  1)

(1)
[(16.0%  17.5%)2  (17.0%  17.5%)2  (18.0%  17.5%)2  (19.0%  17.5%)2 ]
F 
4 1
[(1.5%)2  (0.5%)2  (0.5%)2  (1.5%)2 ]
F 
3
(2.25%  0.25%  0.25%  2.25%)
F 
3
5
F   1.667  1.291
3
 (2)
[(16.5%  16.5%)2  (16.5%  16.5%)2  (16.5%  16.5%)2  (16.5%  16.5%)2 ]
FG 
4 1
[(0)2  (0)2  (0)2  (0)2 ]
 FG 
3
FG  0
(3)
[(15.0%  16.5%)2  (16.0%  16.5%)2  (17.0%  16.5%)2  (18.0%  16.5%)2 ]
FH 
4 1
[(1.5%)2  (0.5%)2  (0.5%)2  (1.5%)2 ]
FH 
3
[(2.25  0.25  0.25  2.25)]
FH 
3
5
FH   1.667  1.291
3
(c) Coefficient of variation: CV  k  k
1.291
CVF   0.0738
17.5%
0
CVFG  0
16.5%
1.291
CVFH   0.0782
16.5%
(d) Summary:
kp: Expected Value
of Portfolio kp CVp
Alternative 1 (F) 17.5% 1.291 0.0738
Alternative 2 (FG) 16.5% 0 0.0
Alternative 3 (FH) 16.5% 1.291 0.0782

Since the assets have different expected returns, the coefficient of variation should be
used to determine the best portfolio. Alternative 3, with positively correlated assets, has
the highest coefficient of variation and therefore is the riskiest. Alternative 2 is the best
choice; it is perfectly negatively correlated and therefore has the lowest coefficient of
variation.