Portfolio analysis

Portfolio A gives mean return of 0.98% and has a standard deviation of 14.38% (port. A= Asset A & Asset B)

Portfolio B give mean return of 3.5% and has a standard deviation of 11.24% (port. B=Asset A & Asset B &Asset C)

which portfolio is better? why?

why should i do diversification?

Anyone can help me answer this? your answers are really appreciated.

by adding asset C to the Portfolio A - you got Portfolio B.

That improved your return - 3.5% vs. 0.98% and reduced your standard deviation (11.24% vs. 14.38%).

So Portfolio B is the better one… and what you achieved higher returns at lower standard deviation is the essence of diversification.

Although not asked for in your question, you might want to think about these questions:

  1. Can you say anything about what the return to Asset C must be relative to portfolio A (i.e. must if be lower or higher than 0.98%?
  2. If the standard deviation of asset C is GREATER than the standard deviation of portfolio A (i.e it’s less than 14.38&), can you say anything about the correlation between its returns and those of portfolio A?
  3. If the standard deviation of asset C is LESS than the standard deviation of portfolio A (i.e it’s less than 14.38&), can you say anything about the correlation between its returns and those of portfolio A?

Hi,

Busprof asks good questions. I would make sure to understand how to calculate the mean and variance of a portfolio, given the weights, returns, and variances of each individual security.

This is one of the more commonly asked concepts in portfolio management.

Best,

Keith

Portfolio B is way better. Make a risk-adjusted return comparison (mean/stedev)