You are contemplating a portfolio of two risky assets, comprising 75% in Deakin Ltd and 25% in Hall Ltd.
Your broker’s analyst has predicted that, on an ongoing basis, the expected returns from these assets will be 8% per annum from Deakin Ltd and 10% per annum from Hall Ltd.
The standard deviations of the returns from the assets are expected to be 9% for Deakin Ltd and 11% for Hall Ltd.
The correlation between the two assets is 0.30.
Answer the following question parts, showing all calculations in each case.
Calculate the expected annual percentage return of the contemplated portfolio.
For the above portfolio, calculate the standard deviation.[HINT: See section 7.4 of Brailsford’s (2015) text-book.)
What happens to the portfolio variance in (a) and (b) above when the asset returns are perfectly negatively correlated? Explain carefully.
With the aid of two hypothetical worked examples, explain hoiow expected utility is a useful criterion for investor choice when the investor payoffs are certain.