Assignment 8
P8-11 Integrative—Expected return, standard deviation, and coefficient of variation Three
assets—F, G, and H—are currently being considered by Perth Industries. The probability
distributions of expected returns for these assets are shown in the following
table.
a. Calculate the expected value of return, for each of the three assets. Which provides
the largest expected return?
b. Calculate the standard deviation, r, for each of the three assets’ returns. Which
appears to have the greatest risk?
c. Calculate the coefficient of variation, CV, for each of the three assets’ returns.
Which appears to have the greatest relative risk?
P8-14 Portfolio analysis You have been given the expected return data shown in the first
table on three assets—F, G, and H—over the period 2013-2016.
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?
P8-15 Correlation, risk, and return Matt Peters wishes to evaluate the risk and return
behaviors associated with various combinations of assets V and W under three
assumed degrees of correlation: perfect positive, uncorrelated, and perfect negative.
The expected returns and standard deviations calculated for each of the assets are
shown in the following table.
a. If the returns of assets V and W are perfectly positively correlated (correlation
coefficient ), describe the range of (1) expected return and (2) risk associated
with all possible portfolio combinations.
b. If the returns of assets V and W are uncorrelated (correlation coefficient 0),
describe the approximate range of (1) expected return and (2) risk associated
with all possible portfolio combinations.
c. If the returns of assets V and W are perfectly negatively correlated (correlation
coefficient ), describe the range of (1) expected return and (2) risk associated
with all possible portfolio combinations.
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