Portfolio analysis

CFA Level I Portfolio Management
#1

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.

#2

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.

#3

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?
#4

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

#5

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