need detail answers

Question

If these two assets are in the same portfolio, would that be better or worsefor the portfolio return? Can you tell by a quick examination, and how?

 

Calculate the standard deviation of the two assets in Exercises 1 and 2 andexplain how you can use the standard deviation to tell which asset is riskier.

 

 

Calculate the coefficient of variation of the two assets in Exercises 1 and 2and explain which asset is riskier, and why

Answer 1

For the first part of your question, I need more detail to understand what is being asked. I can make some general comments. If one only wants to maximize (average) return and doesn't care about risk, then the strategy would be to find the asset with the highest return and invest wholly in that. Obviously this is a very risky strategy. Portfolios are constructed for diversification, to reduce risk. Now are these two assets the only ones in the portfolio? If so, I don't understand the question. If they are being added to an existing portfolio, then you can say that if the average return of an asset is greater than the average return of a portfolio, then adding the asset raises the average return of the portfolio. But it may add risk. Do you know the correlation of the two assets? If two assets are negatively correlated, then investing in both will reduce the risk compared to investing in only one.

 

With respect to the second part of your question, I can't perform the calculation, because your post has no data. However standard deviation measures risk; the higher the standard deviation, the higher the risk. If the exercises contain data for historical returns, you can use a spreadsheet or calculator to compute the standard deviation. If you are not familiar with how to do this, let me know which tool, (spreadsheet, or calculator model) you are using, and I can give instructions if I am familiar with that tool.

 

The coefficient of variation is simply the standard deviation divided by the mean. The same tool that give the standard deviation can also give the mean. Again, a higher coefficient of variation implies higher risk. The coefficient of variation measures risk relative to expected return, making it more meaningful when comparing risk between assets that have different expected returns.