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2. Max Labs Inc. current portfolio of products has a 10% IRR and a 10% standard deviation. The correlation coefficients with the firm portfolio are
| 2. Max Labs Inc. current portfolio of products has a 10% IRR and a 10% standard deviation. The correlation coefficients with the firm portfolio are 0.5 (r=0.5) for both, Dog Treats and Dog Food; zero correlation with Dog Toys (r=0). | ||||||
| A) Calculate the effect of each of the projects on the overall risk of the firm (standard deviation) and on the Coefficient of Variation (CV). To calculate the combined IRR and std. deviations, consider that the weight of each project is 20% of the total portfolio. | ||||||
| Correlation with Portfolio | Portfolio weight | New project | Portfolio Std. Deviation | IRR | C.V. | |
| Existing Portfolio | 1.00 | 100% | 0% | 10% | 10% | 1.00 |
| Firm Portfolio + Treats | 0.50 | 80% | 20% | |||
| Firm Portfolio + Food | 0.50 | 80% | 20% | |||
| Firm Portfolio + Toys | 0.00 | 80% | 20% | |||
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