Suppose that there are four risky assets whose expected returns E(r) and variance- covariance matrix (S) are shown in the spreadsheet below. We also consider the portfolio weights of two portfolios x and y of risky assets (see Cells B8:E9): 8 Portfoliox 9 Portfolio y 13 Variance, 14 Covariance() 15 Correlation P A FOUR-ASSET PORTFOLIO PROBLEM Variance-covariance, S 11 Portfolio x and y statistics: Mean, variance, covariance, correlation 12 Mean 20 Portfolio variance, 21 Portfolio standard deviation o 22 17 Calculating returns of combinations of Portfolio x and Portfolio y 18 Proportion of x 19 Mean portfolio return, 0.10 0.01 0.03 0.05 0.01 0.30 0.06 -0.04 0.20 0.20 10.50% 0.1216 0.0714 0.4540 ? ? ? 0.3 0.03 0.06 0.40 0.02 0.30 0.10 ? 0.05 -0.04 0.02 0.50 0.40 0.10 0.10 Mean, Variance, 0.2014 Question il Question i Mean returns E(r) 7% 9% 11% 20% Question i i. Write the Excel formula used to estimate the mean and variance of portfolio y in cells E12 and E13, respectively. Explain your answer in detail. ii. Write the Excel formula used to estimate the correlation of portfolios x and y in cell B15. iii. Let a portfolio Z which consists of portfolios x and y. The portfolio weight of portfolio x in this new portfolio is 0.3. Estimate portfolio's Z mean return, variance, and standard deviation in cells B19, B20, and B21, respectively. Show your calculations in detail.
Suppose that there are four risky assets whose expected returns E(r) and variance- covariance matrix (S) are shown in the spreadsheet below. We also consider the portfolio weights of two portfolios x and y of risky assets (see Cells B8:E9): 8 Portfoliox 9 Portfolio y 13 Variance, 14 Covariance() 15 Correlation P A FOUR-ASSET PORTFOLIO PROBLEM Variance-covariance, S 11 Portfolio x and y statistics: Mean, variance, covariance, correlation 12 Mean 20 Portfolio variance, 21 Portfolio standard deviation o 22 17 Calculating returns of combinations of Portfolio x and Portfolio y 18 Proportion of x 19 Mean portfolio return, 0.10 0.01 0.03 0.05 0.01 0.30 0.06 -0.04 0.20 0.20 10.50% 0.1216 0.0714 0.4540 ? ? ? 0.3 0.03 0.06 0.40 0.02 0.30 0.10 ? 0.05 -0.04 0.02 0.50 0.40 0.10 0.10 Mean, Variance, 0.2014 Question il Question i Mean returns E(r) 7% 9% 11% 20% Question i i. Write the Excel formula used to estimate the mean and variance of portfolio y in cells E12 and E13, respectively. Explain your answer in detail. ii. Write the Excel formula used to estimate the correlation of portfolios x and y in cell B15. iii. Let a portfolio Z which consists of portfolios x and y. The portfolio weight of portfolio x in this new portfolio is 0.3. Estimate portfolio's Z mean return, variance, and standard deviation in cells B19, B20, and B21, respectively. Show your calculations in detail.
Chapter6: Risk And Return
Section: Chapter Questions
Problem 1Q
Related questions
Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Suppose that there are four risky assets whose expected returns E(r) and variance-
covariance matrix (S) are shown in the spreadsheet below. We also consider the portfolio
weights of two portfolios x and y of risky assets (see Cells B8:E9):
1
8 Portfolio x
9 Portfolio y
A FOUR-ASSET PORTFOLIO PROBLEM
Variance-covariance, S
20 Portfolio variance,
21 Portfollo standard deviation o
0.10
0.01
0.03
0.05
11 Portfolio x and y statistics: Mean, variance, covariance, correlation
12 Mean, Ejr,
13 Variance,
14 Covariance()
15 Correlation P
16
17 Calculating returns of combinations of Portfolio x and Portfolio y
18 Proportion of x
19 Mean portfolio return, r
0.01
0.30
0.06
-0.04
0.20
0.20
10.50%
0.1216
0.0714
0.4540
?
?
?
0.3
0.03
0.06
0.40
0.02
0.30
0.10
?
0.05
0.02
0.50
0.40
0.10
0.10
0.60
Mean, Er
Variance, 0.2014
Question il
Question ili
Mean returns E(r)
?
7%
9%
11%
20%
Question i
i. Write the Excel formula used to estimate the mean and variance of portfolio y in cells
E12 and E13, respectively. Explain your answer in detail.
ii. Write the Excel formula used to estimate the correlation of portfolios x and y in cell
B15.
iii. Let a portfolio Z which consists of portfolios x and y. The portfolio weight of portfolio
x in this new portfolio is 0.3. Estimate portfolio's Z mean return, variance, and
standard deviation in cells B19, B20, and B21, respectively. Show your calculations
in detail.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you