Question

You have inherited $25000 from your uncle and upon his request you donate $10 000 of it to your favourite charity. You decided to invest the rest of the money in 3 different assets (“A-C”). You invest 50% in asset A, 25% in asset B and the remaining amount in asset C. Expected returns for the assets are in the table below:

ASSET	EXPECTED RETURN
A	7%
B	12%
C	18%

1. What is the expected return of your portfolio of assets?
2. How much money do you expect to have in 1 year time?
3. If the assets within the portfolio are positively correlated, but have correlation coefficients of less than 1, what does this tell you about the risk of the portfolio compared to that of the individual assets? Explain.

(15 marks total)

Answer 1

What is the expected return of your portfolio of assets? (4 marks)
=50%*7%+25%*12%+25%*18%=11.00%

How much money do you expect to have in 1 year time? (3 marks)
=10000*(1+11.00%)=11100

If the assets within the portfolio are positively correlated, but have correlation coefficients of less than 1, what does this tell you about the risk of the portfolio compared to that of the individual assets? Explain. (8 marks)
As correlation coefficient is less than 1, the risk of the portfolio will be lesser compared to that of the weighted average of the individual assets. It will be less than the risk of the highest risky asset but more than the risk of lowest risky asset.