5 The management of Gawain plc is evaluating two projects whose returns depend on the future state of the economy as shown below:

The project (or projects) accepted would double the size of Gawain.
Required

(a) Explain how a portfolio should be constructed to produce an expected return of 20 per cent.

(b) Calculate the correlation between projects A and B, and assess the degree of risk of the portfolio in (a).

(c) Gawain’s existing activities have a standard deviation of 10 per cent. How does the addition of the portfolio analysed in

(a) and

(b) affect risk?

Transcribed Image Text:

Probability IRRA (%) IRRB (%) 0.3 0.4 22 27 35 18 15 p.3 5 20