1.

(a) Asset A: (12%+14%+16%)/3 = 14% Asset B: (16%+14%+12%)/3 = 14%

Asset C: (12%+14%+16%)/3 = 14%

(b) NB: just change the year and rest of the math is ok

Mean Expected return Variance = [sum Standard deviation =

Asset M-
Year Count (M = arithmetic (M-A)^2 of all(M-A)^2] / square root of
A A
average) (3-3 variance
2004 1 12% 2% 0.0400%
2005 2 14% 14% 0% 0.0000% 0.0004 2.00%
2006 3 16% -2% 0.0400%
Mean Expected return Variance = [sum Standard deviation =
Asset M-
Year Count (M = arithmetic (M-B)^2 of all(M-B)^2] / square root of
B B
average) (3-3 variance
2004 1 16% -2% 0.0400%
2005 2 14% 14% 0% 0.0000% 0.0004 2.00%
2006 3 12% 2% 0.0400%
Mean Expected return Variance = [sum Standard deviation =
Asset M-
Year Count (M = arithmetic (M-C)^2 of all(M-B)^2] / square root of
C B
average) (3-3 variance
2004 1 12% 2% 0.0400%
2005 2 14% 14% 0% 0.0000% 0.0004 2.00%
2006 3 16% -2% 0.0400%

© NB: just change the year and rest of the math is ok

Portfolio AB:

2004 = 0.5*12%+0.5*16% = 14%

2005 = 0.5*14%+0.5*14% = 14%

2006 = 0.5*16%+0.5*12% = 14%

Portfolio AC:

2004 = 0.5*12%+0.5*14% = 12%

 2005 = 0.5*14%+0.5*16% = 14%

2006 = 0.5*16%+0.5*18% = 16%

(d) Portfolio AB is perfectly negatively correlated, while Portfolio AC is perfectly positively correlated.

(e) NB: just change the year and rest of the math is ok

Option 1: A+B

Asset Asset Portfolio return P = Portfolio mean Portfolio standard

Year Count
A B A*50%+ B*50% return (Pm) deviation
2004 1 12% 16% 14.00%
2005 2 14% 14% 14.00% 14% 0.00%
2006 3 16% 12% 14.00%

Option 2: A+C

Portfolio Standard
Portfolio Variance =
Asset Asset return P = (Pm- deviation =
Year Count mean Pm-P [(Pm-P)^2]/
A C A*50%+ P)^2 square root of
return (Pm) (3-1)
C*50% variance
2004 1 12% 12% 12.00% 2.00% 0.0400%
2005 2 14% 14% 14.00% 0.00% 0.0000%
14% 0.0004 2.00%
-
2006 3 16% 16% 16.00% 0.0400%
2.00%

As the portfolio standard deviation is the indicator of portfolio risk, we conclude that portfolio 1
has no risk, so we conclude that portfolio 1 to be selected for same return but lower risk.

(f) Portfolio AB is preferred since it provides the same return as Portfolio AC but with less risk, as
measured by the standard deviation.

Assignment 2
beta=1.5 Rf=7% Rm=10% E(R)=11%

a) If rm increases by 10% then new Rm=10%*(1+10%)=11%

Required return=7+1.5*(11-7)=13%
If rm decreases by 10%
then new Rm=10%*(1-10%)=9%
Required return=7+1.5*(9-7)=10%

b)Required Return= Rf+Beta*(Rm-Rf) =7%+1.5*(10-7)=11.5%

c)We will not recommend this investment as the actual return is less than the required return by 0.5%

d)if Rm=9% Required return=7+1.5*(9-7)=10% and now we can go ahead with the investment as the
actual return is more than the required return by 1%