Answered step by step
Verified Expert Solution
Question
00
1 Approved Answer
Question 1: (Total = 17 marks) Shares X and Y have the following estimated returns in the four possible states of the economy. Probabilities of
Question 1: (Total = 17 marks) Shares X and Y have the following estimated returns in the four possible states of the economy. Probabilities of occurring (in each possible states) Returns 0.2 0.3 0.3 0.2 Share X -8% 8% 14% 22% Share Y 4% 6% -6% 18% The correlation between the returns of these two companies has been estimated to be 0.35. a) Calculate the expected returns and standard deviations of shares X and Y. 5 marks b) Provide an interpretation of risks of the expected returns calculated in (a) above, assuming that the returns are a random draw from a normal distribution generating the retutis on X and Y. 3 marks c) What is the expected return and standard deviation of a portfolio comprising 40% invested in share X and 60% invested in share Y? 3 marks d) Provide an interpretation of risk of the portfolio expected return calculated in (d) above, 3 marks e) Explain the benefit of forming a portfolio of share X and share Y. 3 marks (Show all necessary calculations/ workings) 21201 NOW 11 ADA
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started