Desiree allocated funds in equity markets. Aluworks and AGA in the ratio of 60% to 40% respectively. Aluworks was invested in the equity markets of SA and AGA in public equity markets of Ghana. She had invested for seven years but realised that the high growth was fizzling out. She was advised to continue to invest but pay attention to volatile swings. Desiree wanted an asset not correlated with Aluworks or AGA. She contemplated moving some funds to US equity markets. the US equity markets was picking up indicating a low correlation.

She saw that Lyxor, USDJIA was invested in public equity markets in the US. She saw that Aluworks, AGA and USDJIA were all listed on the Nairobi Stock Exchange. (Exhibit 1). As a proxy, for the market portfolio, Desiree downloaded the corresponding returdn data for Lyxor World.(Exhibit 1).

She wanted to compare the mean returns and standard deviation of her existing portfolio with an alternative portfolio that would invest 40% in SA, 30% in Ghana and 30% in US. (Exhibit 2). She hoped that the analysis will help her decide whether to diversify her portfolio or remain invested in SA and Ghana only.

She intended to compute betas of Aluworks, AGA and USDJIA using their covariance with the market proxy which would help her figure out their required returns , assuming risk free rate of 2.5% and a market risk premium of 5.5%.

EXHIBIT 1: ANNUAL RETURNS (%) Year ALUWORKS AGA Lyxor USDJIA Lyxor World 2009 2.00 5.86 5.56 7.69 2010 4.25 22.40 6.11 5.79 2011 -29.40 -27.07 7.94 -3.28 2012 13.23 0.60 18.29 20.75 2013 8.86 -6.84 17.09 14.14 2014 2.31 33.87 14.20 15.06 2015 -2.96 -9.28 -4.71 -4.28

EXHIBIT 2: PORTFOLIO WEIGHTS (%) Assets Existing Portfolio New Portfolio

ALUWORKS 60 40

AGA 40 30

Lyxor 30

Required:

1.Using the annual return data provided in Exhibit 1 of the case for ALUWORKS and AGA, calculate their mean returns, standard deviations, covariance, and correlation. With these numbers, calculate the standard deviation and return for Desiree Mofakyes entire portfolio. 2. After adding Lyxor USDJIA, what is the portfolios new standard deviation and return? How does the new portfolio compare with the calculation in Question 1? 3. Based on your data analysis, should Desiree Mofakye diversify her portfolio or remain invested in SA and GHANA only? 4. Calculate the betas of ALUWORKS, AGA, and Lyxor USDJIA. To calculate the covariance with the market proxy, use the Lyxor World return data shown in Exhibit 1 in the case. Assuming a risk-free rate of 2.5 per cent and a market risk premium of 5.5 per cent, what are the required returns for each of the three ETFs? 5.Calculate the existing portfolios beta and the new portfolios beta. Assuming a risk-free rate of 2.5 percent and a market risk premium of 5.5 per cent, what are the two portfolios required returns?