Modern Portfolio Theory All questions valued equally

1. The following data encapsulates historic data on shares in Garbage plc and Rubbish plc:

State of the world (s)	Ps	Return on Garbage	Return on Rubbish
1	0.15	-0.05	-0.07
2	0.35	0.05	0.05
3	0.3	0.07	0.10
4	0.2	0.10	0.12

1. What is the expected return and risk (measured by standard deviation) of each of these securities?
2. What is the covariance and correlation coefficient between the returns on these two securities?
3. Would you recommend investment in a portfolio of (only) these two assets, with Rubbish plc accounting for three-quarters of the total portfolio? Explain fully.

2. (a) Explain fully the implications of the efficient-market hypothesis for financial managers? Does your answer depend on the degree of market efficiency?

(b) Shares in the Uniquely Standard company have a beta coefficient (b) of 2, and a required rate of return of 22.5 per cent. If the risk-free rate is 3 per cent and the market risk- premium is 9.5 per cent, would you recommend investing in this company shares?

3. (a) What are the main principles of (Markowitz) portfolio theory? How does the risk-free lending and borrowing extend the range of investment possibilities (in relation to the efficient portfolio on the efficient frontier)?

(b`) Details of the shares held in a portfolio are given below:

Securities	Beta	Expected Return	Percentage held
Share A	1.1	14%	26%
Share B	0.8	10%	18%
Share C	1.7	18%	31%
Treasury Bill	0	2%	25%

Calculate the expected return and beta of this portfolio. How does the risk of this portfolio compare with that of the market portfolio?