Problem 2 Below is a table with the expected return of three active - A, B and C

Question

Problem 2
Below is a table with the expected return of three active - A, B and C - for the period from 2017 to 2020.

For these assets should evaluate the following:

Alternative 1 - Invest 100% in active A.
Alternative 2 - Investing in assets 50% A and 50% in the active B.
Alternative 3 - 50% invest in asset A and 50% in active C.

Instructions:
1. Calculate the expected return for four years for each of the three alternatives.

2. Calculate the standard deviation for four years for each of the three alternatives.

3. Use the results of the first two parts to calculate variation coefficient for each of the three alternatives.

4. Which of the three investment alternatives you recommend? Why?

Explanation / Answer

1.

2.

4.

Investment may be done in,

Alternative-1: because of higher return

Alternative-2:because of same return with lower standard deviation in comparison of Active C

Years Expected Returns Active A Active B Active C 2017 14 13 12 2018 15 17 12 2019 20 12 17 2020 21 18 19 Expected Return for four years (Return of 2017+Return of 2018+Return of 2019+return of 2020)No. Of years Thus,   (1) Expected Return of: Active A (14+15+20+21)/4 17.5 Active B (13+17+12+18)/4 15 Active C (12+12+17+19)/4 15

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