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

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Consider three risky assets A...
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?
Submitted: 2 years ago.Category: Business and Finance Homework
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1/21/2016
Business Tutor: F. Naz, Bachelor's Degree replied 2 years ago
F. Naz, Bachelor's Degree
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Business Tutor: F. Naz, Bachelor's Degree replied 2 years ago

The time is too short, therefore opting out so other experts may help you, thanks.

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