QUESTION 5

Consider the performance of two securities, J and K over the five year period from 2014 to 2018. The annual return earned on each one of them is as provided in the table below:

Year	J	K
	%	%
2014	37.9	-15.8
2015	28.4	19.8
2016	-0.1	12.8
2017	-50.0	-20.8
2018	31.7	58.6

Required:

Compute the following:

1. Assume your organization had K150 million to invest on 01st January, 2014. If 70% was invested in security J over the holding period, the annual returns would you have earned from a portfolio comprising the two securities.

[05 Marks]

2. The annual volatilities of the portfolio with the above investment proportions; assuming the correlation coefficient between returns on securities J and K remained constant at 0.04 over the holding period.

[10 Marks]

3. Evaluate the performance of the portfolio for each year of the holding period and advise when the performance was satisfactory. Assume a risk-free rate of 6%.

[05 Marks]

Total 20 Marks