Question

You form the following investment portfolio:

$200,000 of portfolio in REITs, 10% annual return

$500,000 in stocks, 8% annual return

$300,000 in bonds, 4% annual return

If the standard deviation of returns in your portfolio is 5%, what is your coefficient of variation (i.e. risk to return ratio)? Round your answer to two decimal places.

Answer 1

Calculating the effective expected annual return for the whole portfolio:-

1. Annual return = 10% of $ 200,000= $ 20,000-------------REITS

Annual return stocks= 8% of $ 500,000= $ 40,000------------Stocks

Annual coupon bonds= 4% of $ 300,000= $ 12,000-----------Bonds

Total portfolio return= $ 20,000 + $ 40,000 + $ 12,000= $ 72,000

Total initial investment= $ 10,00,000

Effective expected annual return combined= ($ 72,000/$ 10,00,000)* 100= 7.2%

Coefficient of Variation is the measure of volatility of an investment and assesses the volatility of your portfolio to expected return on the inverstment. Coefficient of Variation (Risk to Return ratio) = Standard Deviation of portfolio/Expected annual return of portfolio

=5%/7.2%= 0.69