1. You are presented with the following information relating to the expected performance of the stock of company J after one year:

Returns J 100 120 130 150 180 220

Probability 0.05 0.14 0.2 0.36 0.2 0.05

i) Determine the expected return, the standard deviation of returns and coefficient of variation for the above stock. [4]

ii) Suppose you have decided to invest in the above stock, based on the values computed in (i). However, you have read in the financial press about the risk reduction benefits of diversification and decided to combine stock J with other securities. Your Financial Analyst has provided you with the following information relating to two stocks of companies K and L. Further the correlation coefficients between the returns on pair-wise combinations of the two securities are provided:

Security ER Standard deviation with

Correlation

K 250 50 0.5

L 80 10 0.1 -0.2

a) Mr PY has N$ 1 000 000- 00 to invest in a portfolio that is made up of three securities J, K and L. He has indicated that he wants to invest N$ 500 000-00 in K security and an equal proportion in J and L securities. Calculate the risk of this portfolio. [4 marks]

b) Suppose that a certain investor wants to invest in securities K and L. Construct the weights of the minimum variance portfolio and show that its risk is close to zero.[4 marks]