Question 4:

The following table provides the share return forecasts and associated probabilities forABCLimited andXYZLimited. Answer parts 'a' to 'c' using the information provided.

ABC Limited XYZ Limited

Return (%) Probability (%) Return (%) Probability (%)

16.0 50 18.0 30

12.0 30 10.0 20

10.0 20 8.0 50

(a) Calculate the expected return on each share.

(b) Calculate the variance and standard deviation for each share.

(c) Suppose a portfolio comprised of 60% investment in ABC Limited and 40% investment in XYZ Limited can be constructed. An analyst has estimated that the correlation coefficient of the two-asset portfolio is -0.30, calculate the return and standard deviation of this portfolio. Compare your answer with those reported in parts a. and b.