Ra Rb
Year 03 40% -30%
Year 04 -24% 22
Year 05 30 42
year 06 26 46
Corrleation coefficinet= -.2374
Construct a portfolio P that contains A and B in proportions of 40% in A and 60% in B and calculate the returns on the portfolio for each of the years 03 through 06.
I have no clue how to start this.... Please help.
Question: does the portfolio manager re-adjust the portfolio every year to maintain a 40/60 split.
For now, I will assume no, and assume that gains and losses are compounded.
An Excel spreadsheet is very useful for these types of operation. Assume that the initial P=100 and that in year 02 $40 is invested in A and $60 in B. In 03 A grows to 1.40*(40)=56 and B declines to .70*(60)=42.
In 04, A declines to .76*56=42.56 and B grows to 1.22*42=51.24.
Take it from here.