Apple Bank makes a loan to Harry at 12.5 percent per year to be repaid by level annual payments for t years. Exactly one year be
1 answer:
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Answer:
a) i) 13.5% ii) risk on portfolio = 13.63%
b) Volatility of the portfolio (13.65%) is < Volatilities of the individual indexes
Explanation:
<u>A) Determine the return and risk of the portfolio</u>
i) Return [ E(r^p) ] = ∑ wi*ri ---- ( 1 )
where : wi = weight of stocks , ri = rate of return ( estimated ) N = number of stocks
Back to equation 1
E(r^p) = (0.5*14% ) + (0.5*13% ) = 13.5%
<em>ii) risk of portfolio </em>
we can determine the risk of portfolio using the equation below
Vol [ r( t + 1 , $ ) + s ( t + 1 ) ] ( volatility on Japanese equity ) = 13.63%
attached below is the remaining solution
<u>b) comparing the Volatilities </u>
Volatility of the portfolio (13.65%) is < Volatilities of the individual indexes ( i.e. volatility of US return ( 15.5% ) , Volatility of EAFE return ( 16.5% ) )
