(2 points) Your company has a portfolio made up of two assets, one from the US a
ID: 2673407 • Letter: #
Question
(2 points) Your company has a portfolio made up of two assets, one from the US and the other from Swaziland. Their information is as follows:
USA Swaziland
Return 12.2% 18.4%
Deviation 10.5% 23.8%
Weight 50% 50%
The company has asked you to estimate risk and return involved in the existing portfolio (the correlation is .15). They then asked you to estimate, if Swaziland holdings were sold and replaced with assets from Pushistan, what the impact on risk and return would be (the correlation here is .09). Then choose the best based on lowest risk levels.
Pushistan
Return 16.7%
Deviation 14.9%
Weight 50%
Explanation / Answer
USA Swaziland portfolio return = .5x 12.2 + .5 x 18.4 = 15.3 % deviation(risk) = sqrt(0.5^2 x 10.5^2 + 0.5^2 x 23.8^2 +0.15x 0.5 x 0.5x 10.5 x 23.8 ) = 13.36 % USA Pushistan portfolio return = .5x 12.2 + .5 x 16.7 = 14.45 % deviation(risk) = sqrt(0.5^2 x 10.5^2 + 0.5^2 x 14.9^2 +0.09x 0.5 x 0.5 x10.5 x 14.9 ) = 9.31 % what the impact on risk and return would be? Ans: Both, risk as well as return would decrease. On lowest risk level, USA Pushistan portfolio is chosen.
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