What the impact on risk and return would be (the correlation here is .09).
Not what you're looking for?
Your Company has a portfolio made up of 2 assets, One from the USA 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 me to estimate risk and return involved in the existing portfolio (the correlation is .15). They then asked me 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%
Purchase this Solution
Solution Summary
Explanation and computations to assist you.
Solution Preview
Hello!
Let's first find the risk of the first portfolio. The risk is defined as the standard deviation of the portfolio. In order to find the std dev, we must first fin the variance.
Let's call Ra to the return of asset A, Rb to the return of asset B, 'a' to the fraction of the portfolio that corresponds to asset A (for example, 0.3 if it is 30%) and 'b' to the fraction of the portfolio that corresponds to asset B. The formula for the variance of this two-asset portfolio is the following:
Var(portfolio) = (a^2)*Var(Ra) + (b^2)*Var(Rb) + 2*a*b*Corr(Ra, Rb)*StdDev(Ra)*StdDev(Rb)
[the ^ symbol means "to the power of"]
Let's say that the USA asset is asset A; and ...
Purchase this Solution
Free BrainMass Quizzes
IPOs
This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)
Social Media: Pinterest
This quiz introduces basic concepts of Pinterest social media
Understanding Management
This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.
Employee Orientation
Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.