The V olatility of a La r g e P o r t f olio

The V olatility of a La r g e P o r t f olio

Using the data in Table 11.1,

a. Compute the annual returns for a portfolio with 25% invested in North Air, 25% invested in West Air, and 50% invested in Tex Oil.

b. What is the lowest annual return for your portfolio in part a? How does it compare with the lowest annual return of the individual stocks or portfolios in Table 11.1?

Stock Returns

Portfolio Returns

Year

North Air West Air

Tex Oil

1/2RN + 1/2RW 1/2RW + 1/2RT

2007

21% 9%

-2%

15.0% 3.5%

2008

30% 21%

-5%

25.5% 8.0%

2009

7% 7%

9%

7.0% 8.0%

2010

-5% -2%

21%

-3.5% 9.5%

2011

-2% -5%

30%

-3.5% 12.5%

2012

9% 30%

7%

19.5% 18.5%

Average Return

10.0% 10.0%

10.0%

10.0% 10.0%

Volatility

13.4% 13.4%

13.4%

12.1% 5.1%

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