Posted by **Mitchell** on Wednesday, June 20, 2007 at 10:37pm.

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.

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