Driver 1: The assets' individual performance

The video reviewed the three types of drivers for a portfolio's performance: (i) the individual performance of the assets in terms of risk and return, (ii) the portfolio weight of each of the assets, (iii) the correlation between the asset returns.

Now let's analyze some data to get a better grasp of this result! In this example, you will consider investing – with monthly frequency – in U.S. equities and U.S. bonds. Each assets' returns are stored in your workspace as returns_equities, and returns_bonds. In addition, the portfolio is invested 60/40, meaning that every month you invest 60% in equities and 40% bonds. These portfolio returns are stored as returns_6040.

Which of the following statements about the relationship between portfolio performance (investing in both equities and bonds) and the individual assets' performance (investing in only one of them) is true?

Possible answers

Investing entirely in returns_equities has a lower risk than investing in the portfolio.

The portfolio mean return equals the position weighted sum of the component mean returns. You can test this using: all.equal(mean(returns_6040), 0.6 * mean(returns_equities) + 0.4 * mean(returns_bonds))

The investment value evolution of the bond is rather smooth because of the high standard deviation of the bond returns.

None of the above statements are correct.

Exercise

Driver 1: The assets' individual performance

Instructions

Possible answers