P513 Portfolio analysis Essays - Mathematical Finance, Investment

P513 Portfolio analysis Essays - Mathematical Finance, Investment P513 Portfolio analysis You have been given the return data shown in the first table on three assetsF, G, and Hover the period 20072010. Using these assets, you have isolated the three investment alternatives shown in the following table: a. 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? a.Expected portfolio return: Alternative 1: 100% Asset F Alternative 2: 50% Asset F + 50% Asset G Asset FAsset GPortfolio Return Year(wF x kF)+(wG x kG)kp 2001(16% x .50 = 8.0%)+(17% x .50 = 8.5%)=16.5% 2002(17% x .50 = 8.5%)+(16% x .50 = 8.0%)=16.5% 2003(18% x .50 = 9.0%)+(15% x .50 = 7.5%)=16.5% 2004(19% x .50 = 9.5%)+(14% x .50 = 7.0%)=16.5% Alternative 3: 50% Asset F + 50% Asset H Asset FAsset HPortfolio Return Year(wF x kF)+(wH x kH)kp 2001(16% x .50 = 8.0%)+(14% x .50 = 7.0%)15.0% 2002(17% x .50 = 8.5%)+(15% x .50 = 7.5%)16.0% 2003(18% x .50 = 9.0%)+(16% x .50 = 8.0%)17.0% 2004(19% x .50 = 9.5%)+(17% x .50 = 8.5%)18.0% b.Standard Deviation: (1) (2) (3) c.Coefficient of variation: CV= d.Summary: kp: Expected Value of PortfoliokpCVp Alternative 1 (F)17.5%1.291.0738 Alternative 2 (FG)16.5%-0-.0 Alternative 3 (FH)16.5%1.291.0782 Since the assets have different expected returns, the coefficient of variation should be used to determine the best portfolio. Alternative 3, with positively correlated assets, has the highest coefficient of variation and therefore is the riskiest. Alternative 2 is the best choice; it is perfectly negatively correlated and therefore has the lowest coefficient of variation.