You have been asked for your advice in selecting a portfolio of assets and have

Question

You have been asked for your advice in selecting a portfolio of assets and have been given. the following data: You have been told that you can create two portfolios-one consisting of assets A and B and the other consisting of assets A and C-by investing equal proportions (50%) in each of the two component assets. What is the expected return for each asset over the 3-year period? What is the expected return for each of the two portfolios? You are further asked to evaluate the individual stock and recommend which stock is best. Which stock would you recommend? Why? Discuss the statement, "do not put all your eggs in one basket".

Explanation / Answer

a. Expected return of Asset A = (12 + 14 + 16)/3 = 14%
Expected return of Asset B = (16 + 14 + 12)/3 = 14%
Expected return of Asset C = (12 + 14 + 16)/3 = 14%

b. Expected return of Portfolio of A and B = (14*50%) + (14*50%) = 14%
Expected return of Portfolio of A and C = (14*50%) + (14*50%) = 14%

c. Asset A and C are recommended because although the Expected return of all three assets are equal but the return of Asset B is showing downward trend while the return of Asset A and C is showing upward trend. Thus, Asset A and C are recommended.

d. "Do no put all your eggs in one basket", is a Markowitz theory portfolio management which means an investor should not invest all of his money only in one asset but should diversify its investment by investing in the portfolio of assets. This is done because if we invest all funds in only one asset and if the stock moves downward all funds will get zero. On the other hand, in case of portfolio only a part of fund will be lose and not all.

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