QUESTION 2

a. Laurie Lawrence Ltd, a tourist operator in Queensland, was founded in 1995. Over the last six

years, it has reported annual returns of 7%, 9%, 6%, 11%, 12% and-3% respectively. Over that

period, the risk-free rate averaged 3% per annum. Calculate the following measures for the

company over the last 6 years.

i.

The arithmetic average return.

ii.

The standard deviation.

iii.

The geometric average annual return.

iv.

The Sharpe ratio

b.

Based on the above calculations, and having regard to the industry in which the company is

operating, would you recommend that an investor buy shares today in Laurie Lawrence Ltd?

Give reasons.

c. Assume that you manage a risky portfolio with an expected return of 15% and a standard

deviation of 24%. The T-bill money market risk-free rate is 5%. Jenny Li chooses to invest 60%

of her portfolio in your fund and 40% in a T-bill money market fund.

i.

What is the expected return and standard deviation of Jenny's portfolio?

ii.

Suppose you risky portfolio includes the following investments in the given proportions:

Stock X, 20%; Stock Y, 35%; and Stock Z, 45%.

What are the investment proportions of each stock in Jenny's overall portfolio,including

the investment in the T-bill money market fund?

d.

Suppose,instead of investing the proportions stated under c. above, Jenny decides to invest a

proportion (x) of her total portfolio in your risky portfolio and the balance in the T-bill money

market fund so that the overall portfolio will have an expected return of 12%. What is the

proportion,x?