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Portfolio Return and Risk for Different Weights and Correlation Coefficients

Table

Portfolio Return and Risk for Different Weights and Correlation Coefficients

Portfolio Return and Risk for Different Weights and Correlation Coefficients

A perusal of the Table 3.4 leads to the following notable inferences:

(i) Two assets/securities can be combine in such a way that the portfolio risk is individuals assets comprising the portfolio. For example. portfolio standard deviation is 15.20 per cent when combine coefficient (P) is 0.5 and Land H are combined in !he ratio of 80:20. This is lower than the standard deviation L (16 per cent) and H (20 per cent).

(ii) For given weights, portfolio standard deviation declines 33 correlation coefficient moves from + 1.0 to – 1.0. For example. when Land H are combined in !he ratio of 80:20, !he range of portfolio standard deviation is 16.80 per cent for perfect positive con-elation (p = + 1.0) to 8.80 per cent for perfect negative correlation (p a -1.0).

(iii) When returns have less than perfect positive correction. some combinations are more efficient than others; they do not involve risk-returns trade-off. For coefficient in the weight of H from 0 per cent to 30 per cent raises the expected return from 12 per cent to 1.2 per cent. but Standard deviation (risk) declines from 16 per cent to is 12 percent.

(iv) For given obliteration coefficient, there Is a minimum variance or minimum risk portfolio. The minimum variance portfolio has a standard deviation smaller than that of either of the individual component asset (securities). The optimal weights (w) that produce the minimum variance y be obtained from Equation (3.8) and Equation (3.9):

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