Reference no: EM132753303
The following tables contain information about three assets, A, B and C.
Standard deviation(%) Beta Expected return (%)
Asset A 30 0.8 12
Asset B 10 1.8 10
Asset C 15 1.2 8
Correlation
of returns Asset A Asset B Asset C
Asset A 1
Asset B 0.5 1
Asset C 0.1 -0.5 1
Required:
(i) Compare Assets A and B. Which asset has greater total risk? Which has greater systematic risk? Which has greater unsystematic risk? Which asset has a higher risk premium?
(ii) A portfolio is constructed with 40% invested in A, 60% in B. What is the portfolio's Beta? What is the standard deviation of the portfolio?
(iii) Assume you want to construct an equally-weighted portfolio with only two assets and you want the portfolio to have the MINIMUM risk, which two assets should you include into the portfolio? and what is the portfolio's risk?
(iv) Portfolio A is an equally-weighted portfolio with Asset A and B; Portfolio B is an equally-weighted portfolio with Asset A, B and C. which portfolio has smaller standard deviation?
(v) If the risk free rate of interest is 4%, what are the Sharpe ratios of Asset A and B. Compare the two assets' performance based on their Sharpe ratios.
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