Corporate Finance Assignment: Portfolio Risk and Return

This corporate finance assignment focuses on portfolio analysis, covering the calculation of expected returns and standard deviations for various portfolios. The student analyzes different portfolios with varying asset allocations, considering the impact of diversification on risk. The assignment involves calculating portfolio risk and return, comparing different investment strategies, and understanding the relationship between risk and return. The analysis includes detailed calculations for multiple portfolios, considering correlations between assets and assessing the impact of risk-free assets. The student demonstrates an understanding of portfolio diversification and its effect on overall risk. The assignment concludes with a discussion of the risk-return trade-off and the implications of asset weighting on portfolio performance. This assignment showcases practical application of financial concepts.

Running Head: CORPORATE FINANCE 0
Corporate Finance
(Student Name)
3/13/2020

CORPORATE FINANCE 1
Table of Contents
Part 1................................................................................................................................................2
Part 2................................................................................................................................................2
Part 3................................................................................................................................................3
Part 4................................................................................................................................................3
Part 5................................................................................................................................................3
Part 6................................................................................................................................................4
Part 7................................................................................................................................................5
References........................................................................................................................................6

CORPORATE FINANCE 2
Part 1
Expected Return of Portfolio
= WA * EA + WB * EB
= 0.4 * 0.115 + 0.6*0.14
= 13%
Standard Deviation of Portfolio 1:
= WA2* A2+WB2* b2+2*Weight of A*Weight of B*Correlation of A and B* standard deviation of
A*standard deviation of A)^1/2
= √0.42 (0.23)2 + 0.62 (0.43)2 + 2 (0.4) *(0.6) * (0.25) * (0.23) * (0.43)
=29.4%
Part 2
Expected Return of Portfolio 2:
= WA * EA + WB * EB + WC * EC
= 0.6 * 0.115+ 0.225 * 0.14 + 0.175 * 0.18
=13.2%
Standard Deviation of Portfolio 2:
(WA2* A2+WB2* b2+Wc2* c2+2*Weight of A*Weight of B*Correlation of A and B* standard
deviation of A*standard deviation of A+2*Weight of A*Weight of C*Correlation of A and C*
standard deviation of A*standard deviation of C+2*Weight of B*Weight of C*Correlation of B
and C* standard deviation of B*standard deviation of C)^1/2
[0.62 (0.23)2 + 0.2252 (0.43)2+ 0.1752 (0.58)2 + 2[ (0.6) (0.225) (0.25)(0.23) (0.43)] + 2 [(0.6)
(0.175) (0.4) (023) (0.58)] + 2 [(0.225) (0.175) (0.15) (0.43) (0.58)]] ^ ½

CORPORATE FINANCE 3
= (0.039 + 0.0067 + 0.011 + 0.0029)^ ½
= (0.059) ½
= 24.4%
Part 3
In order to analyse the both portfolio A and B, it has been found that both portfolios has sae
expected return. However, Portfolio 2 has lower risk. Therefore, Portfolio is more diversified
than portfolio 1 due to the reason it contain all three assets (Baron et al., 2019).
Part 4
Expected Return of Portfolio 3:
WA * EA + WB * EB + Wf * Ef
0.048 (0.115) + 0.75 (0.14) + 0.202 (0.099)
13.05%
Standard Deviation of Portfolio 3
WA2 * (SDA)2 + WB2 * (SDB)2 + WF2 * (SDF)2 + 2WA WB SDASDB Correlation AB +
2WA WF SDASDF Correlation AF + 2WB WF SDBSDF Correlation BF
= (0.048)2 * (23)2 + (0.75)2 * (0.43)2 + (0.202)2 * (0)2 + 2(0.048) * (0.75) * (23)* (43) * (0.25)+0+0
= 1059.083316
=32.54%
Part 5
Expected Return of Portfolio 4:

CORPORATE FINANCE 4
= WA * EA + WB * EB + WC * EC
= 0.33 * 0.115+ 0.33 * 0.14 + 0.33 * 0.18
=14.3%
Standard Deviation of Portfolio 4
(WA2* A2+WB2* b2+Wc2* c2+2*Weight of A*Weight of B*Correlation of A and B* standard
deviation of A*standard deviation of A+2*Weight of A*Weight of C*Correlation of A and C*
standard deviation of A*standard deviation of C+2*Weight of B*Weight of C*Correlation of B
and C* standard deviation of B*standard deviation of C)^1/2
[0.332 (0.23)2 + 0.332 (0.43)2+ 0.332 (0.58)2 + 2[ (0.33) (0.33) (0.25)(0.23) (0.43)] + 2 [(0.33)
(0.33) (0.4) (023) (0.58)] + 2 [(0.33) (0.33) (0.15) (0.43) (0.58)]] ^ ½
=(0.062+0.0054+0.011+0.0081)1/2
=(0.0865)1/2
= 29.4%
Part 6
Expected Return of Portfolio 4:
WA * EA + WB * EB + WC * EC+ WF* EF
=0.25 * 0.115+ 0.25 * 0.14 + 0.25 * 0.18 + 0.25 (0.099)
2*(0.25)*(0.25)*(0.4)*(23)*(58)+2*(0.25)*(0.25)*(0.15)*(43)*(58)
=13.35 %

CORPORATE FINANCE 5
Standard Deviation
WA2 * (SDA)2 + WB2 * (SDB)2 + WF2 * (SDF)2 + Wc2* c2+ 2WA WB SDASDB Correlation AB +
2*Weight of A*Weight of C*Correlation of A and C* standard deviation of A*standard
deviation of C+2*Weight of B*Weight of C*Correlation of B and C* standard deviation of
B*standard deviation of C
=(0.25)^2*(23)^2+(0.25)^2*(43)^2+(0.25)^2*(0)^2+(0.25)^2*(58)^2+2*(0.25)*(0.25)*(23)*(43
)*(0.25)+2*(0.25)*(0.25)*(0.4)*(23)*(58)+2*(0.25)*(0.25)*(0.15)*(43)*(58)+0+0
=√503.24375
=22.43%
Part 7
The risk is correlated with standard variance, and the portfolio with greater risk-free asset
weighting would be at reduced risk, with a 25% risk-free asset getting a lower risk in Section 5
with a better return of 9.9% on higher value asset weight. Higher risk pays higher returns (Wang,
Li and Watada, 2017).

CORPORATE FINANCE 6
References
Baron, M., Brogaard, J., Hagströmer, B., and Kirilenko, A. (2019). Risk and return in high-
frequency trading. Journal of Financial and Quantitative Analysis, 54(3), 993-1024.
Wang, B., Li, Y., and Watada, J. (2017) Multi-period portfolio selection with dynamic
risk/expected-return level under fuzzy random uncertainty. Information Sciences, 385, 1-18.