QUESTION 5

Consider the performance of two securities, J and K over the five year period from 2000 to 2004. The annual return earned on each one of them is as provided in the table below:

Year	J	K
	%	%
2000	-30.0	6.4
2001	55.9	-21.1
2002	15.7	-10.0
2003	75.9	35.0
2004	5.7	15.6

Required:

Compute the following:

1. The appropriate annual average return for both securities over the 5-year holding period; assuming re-investment of all returns for respective years.

[05 Marks]

2. Assume your organization had K100 million to invest on 01st January, 2000. If 60% was invested in security J, what average return would you have earned from a portfolio comprising the two securities?

[05 Marks]

3. What average volatility would the portfolio be exposed to; assuming the correlation coefficient between returns on securities J and K is -0.852?

[05 Marks]

4. Evaluate the performance of the securities individually and the portfolio. Which investment would you advise management to make? Assume a risk-free rate of 6%.

[05 Marks]

Total 20 Marks