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?