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Megan Clarke has a full diversified portfolio currently valued at 100,000. She subsequently inherits Carworks stocks from a generous Aunt which is worth 20,000. Her
Megan Clarke has a full diversified portfolio currently valued at 100,000. She subsequently inherits Carworks stocks from a generous Aunt which is worth 20,000. Her financial adviser provides her with the following forecasted information on the expected risks and returns of her portfolio and the Carworks stock. The correlation between Carworks returns and the original portfolio returns is currently 0.65 and this is expected to continue. The inheritance changes Megan's overall portfolio. Calculate i. the new expected return of her portfolio including the Carworks stock ii. the covariance of Carworks returns with the original portfolio returns iii. the standard deviation of the new portfolio, including the Carworks stock iv. Comment briefly on the standard deviation of the new portfolio versus that of the original portfolio. (17 marks) (b) If you were an investment manager of a public sector pension fund what assets would you include in your portfolio and what risks would be of most concern to you in the current environment
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