Explaining strength of relationship between the assets

Reference no: EM1315018

Q1) Suppose the following expectations about 2 assets returns:

State	Probability	Asset A	Asset B
Bad	30%	-3%	15%
Normal	40%	6%	10%
Good	30%	11%	5%

a) Determine the expected return and risk of 2 assets?

Expected Return of individual asset would be calculated by multiplying probability of each scenario to respective return of those scenarios.

Return on Asset A	4.80%
Return on Asset B	10.0%

Risk is stated as standard deviation of asset return after adjusting probability of their occurrence in each scenario. Computation is done in excel

Standard Deviation of Asset A	2.21%
Standard Deviation of Asset B	1.61%

b) Suppose a portfolio based on 40% of asset A and 60% of asset B. Determine the expected return and risk for portfolio?

Weight of Asset A	40%
Weight of Asset B	60%
Return on Asset A	4.80%
Return on Asset B	10.0%
Return of the portfolio	7.92%

Weight of Asset A	40%
Weight of Asset B	60%
Standard Deviation of Asset A	2.21%
Standard Deviation of Asset B	1.61%
Correlation between two asset	-0.773727513
Risk of the Portfolio	0.63%

c) Explain the strength of relationship between the assets?

Reference no: EM1315018

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