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Mr. David Booker is a financial manager for Goldstone Company Ltd, a manufacturer of Automotive Components, and must evaluate the risk and return of two
Mr. David Booker is a financial manager for Goldstone Company Ltd, a manufacturer of Automotive Components, and must evaluate the risk and return of two assets. The firm is considering including these two (2) assets to its diversified portfolio. The following information is provided on the two assets X and Y Return of Asset X Return of Asset Y State of economy Recession Normal Boom the Probability of State of Nature 0.10 0.60 0.30 30% -2096 10% 70% 20% 50% i. ii. ili. What is the expected return on each asset? (4 marks) What is the standard deviation of returns of each asset? (4 marks) What is the coefficient of variation for each asset? (2 mark) Which asset is more volatile? Why (2 marks) iv. E. Suppose you use $1,000,000 to construct a portfolio comprising of Asset X and Asset Y, such that you invest $600,000 in Asset X and $400,000 in Asset Y. Also you have done some research and estimated the Beta () of the Assets to be: Asset X=0.9, and Asset Y=1.25. Use the expected returns calculated for each Asset in (c), above to calculate the following: i. The expected return on the portfolio. (2 marks) Calculate the expected beta of the portfolio. (2 marks)
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