Question

Need help with the part that refers to "use 10% as the smallest unit of combination"; I am getting only 33 iterations and there are supposedly 66. "A portfolio manager is trying to calculate the best combination of three assets stock, bonds and commodities. From the past performance, he has calculated the following Stock Bonds commodites expected return 10% 3% 5% Variance 215% 80% 150% Standard deviation 147% 89% 122% Corretion between stocks and bonds 0.25 Correlation between sock and commodities 0.5 Correlation between bonds and commodities 0.6 a. Calculate all expected returns and standard deviations of all portfolio combinations. Use 10% as the smallest unit of the combination, so for example the first combination will be stock 10 0%, Bonds 0% and Commodities 0%, second combination stock 100% Bonds 10%, Commodities 0% and so on. (5 marks)

Answer 1

The statement which says Use 10% as the smallest unit of combination means we are doing combinations as

1.stock 100%, Bonds 0%, commodities 0%

2.stock 90%,bonds 10%, commodities 0%

3.stock 80%, bonds 10%, commodities 10%..

like this we are assuming the combinations so while assuming the combinations it should not be less than 10% which means 9% or 2.5% etc are not taken into consideration.

The expected return formula E(r)= r1*p1 + r2*p2+.. or r1+r2+r3+r4+..rn/n

Standard Deviation formula

where Er is the expected return

r_i is the individual return

If probability is not given then

using these formulas we calculate the expected return and standard deviation(risk).