Consider the following scenario analysis involving asset X and asset .pdf

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Consider the following scenario analysis involving asset X and asset Y: Compute the expected returns and the standard deviations for both assets. Compute the correlation coefficient between the returns on the two assets. Can you build a portfolio of assets X and Y with zero risk? Prove that your portfolio indeed riskless. Solution Expected Return Asset X E(RX) = 0.1*.30+0.2*.20+0.4*0.15+0.2*0.10+0.1*(0.50) = 10% Asset Y E(RY) = 0.1*0.12+0.2*0.10+0.4*0.09+0.2*0.08+0.1*(0.04) = 8% Standard Deviation SD(Rx) = [0.1 × (0.30-0.10)2 + 0.2 × (0.20-0.10)^2+ 0.4*(0.15-0.10)^2+ 0.2*(0.10- 0.10)^2+0.10*(-0.50-0.10)^2]0.5= 0.20736441= 20.74% SD(Ry) = [0.1 × (-0.12-0.08)2+ 0.2 × (0.10-0.08)^2+ 0.4*(0.09-0.08)^2+ 0.2*(0.08- 0.08)^2+0.10*(-0.40-0.08)^2]0.5 = 0.04147288= 4.15% Calculate the correlation coefficient between the retrurn on the two assets. Firts we need to find covariance COV(Rx,Ry) = 0.1*(0.30-0.10)*(0.12-0.08) + 0.2*(0.20-0.10)*(0.10-0.08)+0.4*(0.15- 0.10)*(0.09-0.08)+0.2*(0.10-0.10)*(0.08-0.08)+0.1*(-0.50-0.10)*(-0.04-0.08) = 0.0086 CORR(RA,RB) = 0.0086/ (0.20736441 × 0.04147288) = 1.

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