Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.

Get a Professional Answer

Via email, text message, or notification as you wait on our site. Ask follow up questions if you need to.

100% Satisfaction Guarantee

Rate the answer you receive.

Ask linda_us Your Own Question

linda_us, Master's Degree

Category: Multiple Problems

Satisfied Customers: 1402

Experience: A tutor for Business, Finance, Accounts and other related topics.

19873544

Type Your Multiple Problems Question Here...

linda_us is online now

Consider three risky assets A, and C, with expected return

Customer Question

Consider three risky assets A, B and C, with expected return E[RA] = 11%, E[RB] =14% and E[RA] = 15% and standard deviation A = 25%, B = 30% and C = 32%, respectively. The covariance between asset A and asset B is Cov(RA;RB) = 0:0125, the covariance between asset B and asset C is Cov(RB;RC) = 0:025 and the covariance between asset A and asset C is Cov(RA;RC) = 0:05. (A) Calculate the correlation matrix, i.e. the correlation of each pair of assets. (B) Calculate the expected return and standard deviation of a portfolio with weights wA = 0:4, wB = 0:3 and wC = 0:3 in assets A, B and C respectively. (C) How would the risk (i.e. the standard deviation of the portfolio) change, if the covariance between asset B and asset C had a positive sign (keeping everything else unchanged)? No need for calculation. Give a verbal answer with reasonable argument. (D) Can you achieve diversification effect (i.e. reduction of the standard deviation by combining assets in a portfolio) if the assets are perfectly correlated (i.e. the correlation coefficient is 1 for all pairs of assets)? (E) How will the diversification effect (i.e. the risk reduction achieved by combining the assets in the portfolio) change if the expected return of all three assets increases by 3 percentage points?