You have been given the expected return data shown in the first table on three —

Question

You have been given the expected return data shown in the first table on three —F, G, and H over the period 2016-2019:

2016 10% 11% 8%

2017 11% 10% 9%

2018 12% 9% 10% 2019 13% 8% 11%

Using these assets, you have isolated the three investment alternatives shown in the following table

1 100% of asset F

2. 50% of asset F and 50% of asset G

3. 50% of asset F and 50% of asset H

Calculate the expected return over the 4-year period for each of the three alternatives.

b.Calculate the standard deviation of returns over the 4-year period for each of the three alternatives.

c.Use your findings in parts a and b to calculate the coefficient of variation for each of the three alternatives.

d.On the basis of your findings, which of the three investment alternatives do you recommend? Why?

Explanation / Answer

We select alternative 2 (50% F and 50% G) as it has the lowest coefficient of variation.

Year Asset F Asset G Asset H Alt. 1 Alt. 2 Alt. 3 2016 10% 11% 8% 10.00% 10.50% 9.00% 2017 11% 10% 9% 11.00% 10.50% 10.00% 2018 12% 9% 10% 12.00% 10.50% 11.00% 2019 13% 8% 11% 13.00% 10.50% 12.00% Returns 11.50% 10.50% 10.50% S.D. 1.29% 0.00% 1.29% CV 11.23% 0.00% 12.30%

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