## (Answered) Portfolio Diversification

I need this assignment within 12 hours from now. Document Preview: Problem 1: Suppose a risk-averse investor can choose from the following three investments. Investment Expected Return (E[ri]) Standard Deviation ((i) A 12% 30% B 15% 25% C 18% 40% First assume that the investor must choose one of the three stocks to hold (i.e. the investor is forced to choose just one asset and invest 100% of his wealth in that asset). Consider only A and B. Can you tell which investment will be chosen? Explain why or why not? Now consider only B and C. Can you tell which investment will be chosen? Explain. Now suppose that investors are free to hold portfolios of assets. Assume that the correlation between the returns on asset A and asset C is (AC = -0.9 and define investment D as putting half your money in asset A and half in asset C. Calculate the mean and standard deviation on an investment in D. Given the choice between B and D, can you say which investment is preferred? Given this, can you say based on your answer to part a) that a risk-averse investor would never hold asset A? Why or why not? Problem 2 Assume that you need to invest all of your wealth in just two securities: A and B below. You may choose any allocation between these two assets. The two assets? returns and standard deviations are shown below: Investment Expected Return (E[ri]) Standard Deviation ((i) A 20% 15% B 10% 12% Assume that the returns of the two securities have zero correlation. Assume you place proportion w of your wealth in A and 1-w of your wealth in B. Calculate the expected returns on the standard deviations of the following portfolios. Case W 1-w E[rp] (p 1 1 0 20% 15% 2 0.75 0.25 17.5% 14.25% 3 0.5 0.5 15% 13.5% 4 0.25 0.75 12.5% 12.75% 5 0 1 10% 12% (b) Plot your results from part (a) on a graph with the portfolio's expected rate of return on the vertical axis and the standard deviation of the portfolio's return on the horizontal axis. Sketch the expected return as a function of the... Attachments: ps3-diverse.doc efficient-fro....xlsx
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Portfolio Diversification

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