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Consider the data on the follow two pairs of securities (A and B) and (X and...

Consider the data on the follow two pairs of securities (A and B) and (X and Z).

Security                             Expected Return              Standard Deviation        

     A                                                  .10                                      .20

     B                                                  .20                                      .20

     X                                                  .10                                      .20

     Z                                                   .20                                      .20

The correlation between the returns on A and B is .6, while the correlation between the returns on X and Z is zero.

Consider two portfolios:              Portfolio 1: 50% in A and 50% in B

                                                          Portfolio 2: 50% in X and 50% in Z.

Questions:

  1. Which portfolios will have the lower return variance? Circle one and explain.

              Portfolio 1                        Portfolio 2                        Both will be the same

  1. Which portfolio with have the largest expected return? Circle one and explain.

              Portfolio 1                        Portfolio 2                        Both will be the same

  1. Which portfolio will have the largest Sharpe ratio? Circle one and explain.

              Portfolio 1                        Portfolio 2                        Both will be the same

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