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Calculate the portfolio return and standard deviation

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Reference no: EM132856665

Question - You are planning to invest $200,000. Two securities are available, A and B, and you can invest in either of them or in a portfolio with some of each. You estimate that the following probability distributions of returns are applicable for investment in A and B:

Probability

A

B

0.1

(10%)

(30%)

0.2

5%

0%

0.4

12%

20%

0.2

26%

40%

0.1

40%

70%

Required -

a) Calculate the coefficient of variation for the two securities and determine which of the two is more risky.

b) Calculate the portfolio return and standard deviation if equal amount of the two securities are combined assuming the correlation between the returns of the two securities is -0.50.

c) In what proportion should the two securities combined to have the least risky portfolio?

d) Do you think such type of diversification is applicable in Ethiopia?

Reference no: EM132856665

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