Portfolio

Travelvan plc is a manufacturer of caravans based in Bristol. It is considering a major project which involves expanding production at its existing Bristol factory. The returns of the company and the project depend on economic growth as set out in the table below:

outcomes
economic growth	probability	company return	project return
good	0.2	20%	22%
average	0.4	18%	18%
poor	0.4	16%	0%

Requirements

1. Calculate the expected return and the standard deviation of return for both the company and the project.

(6 marks)

2. Calculate the covariance and correlation between the returns of the company and the project.

(3 marks)

3. Travelvan plc estimates the project will account for 10% of the companys total market value after its acceptance. Calculate the expected return and the standard deviation of return for the combination of the company and the project.

(4 marks)

4. An investment analyst has estimated the beta () of the project at 1.3. The risk free rate is 3.5% pa and the risk premium on shares is currently 10% pa. Explain whether the directors should focus on the projects beta or its standard deviation (as calculated in part (a)) in their assessment of the projects viability.

(12 marks)

(Total 25 marks)