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Question 2 (10 Marks) Barry is considering investing in three shares A, B and C. The returns of the shares over the next year are
Question 2 (10 Marks) Barry is considering investing in three shares A, B and C. The returns of the shares over the next year are assumed to follow a multivariate normal distribution as below: (A,B,C)-N3 (, D) where = (4%, 5%,8%) 0.0016 0.00046 D = 0.00046 0.0036 0.0012 -0.0024 = 0.0012 -0.0024 0.01 Barry is planning to invest 25% of his money in share A, 35% in share B and 40% in share C. l a) Calcylate the expected return on Barry's portfolio. [2 marks] b) Calculate the variance and standard deviation of the return on Barry's portfolio. [4 marks) c) What is the probability that Barry's planned portfolio will earn a negative return over the next year? [2 marks] d) Chris has suggested that Barry should take the 25% of his money planned for share A and invest it in share D instead. Share D has the same expected return and standard deviation as share A, but is independent of shares A, B and C. Should Barry follow this advice? Explain why or why not. [2 marks]
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