Data set 1 year returns on investment x returns on investmen

Data set 1.

year

returns on investment x

returns on investment y

2000

5%

2%

2001

6%

2%

2002

4%

2%

2003

6%

2%

2004

5%

2%

2005

4%

2%

2006

4%

2%

2007

5%

2%

2008

6%

2%

2009

6%

2%

2010

4%

2%

2011

5%

2%

2012

2%

2%

2013

1%

2%

Base your answers on Data Set 1. Use the Average, STDEV.s and CORR functions to answer the questions about data set 1. Assume the past is the best forecast of the future.

Numbers should be carried to 2 decimals in Excel .

QUESTION: If you invest 75% of your capital in investment X and 25% in Investment Y the resulting portfolio will have an expected return of 3.88% and risk of 1.13% as measured by the sample standard deviation of returns. Diversification has reduced risk by approximately 25% compared to a portfolio of 100% invested in asset X. Expected return from diversification has been reduced by approximately 13.8%.

True or False

year	returns on investment x	returns on investment y
2000	5%	2%
2001	6%	2%
2002	4%	2%
2003	6%	2%
2004	5%	2%
2005	4%	2%
2006	4%	2%
2007	5%	2%
2008	6%	2%
2009	6%	2%
2010	4%	2%
2011	5%	2%
2012	2%	2%
2013	1%	2%

Solution