question B

Question 2 Patrick Poh is a Singapore equities fund manager and manages a fund with total assets worth SS100 million. He adopts an enhanced indexing strategy and hopes to deliver excess return above the STI index return. He is considering the inclusion of a utilities stock, Gas Stop, into his portfolio. He has compiled the following information: Current Portfolio STI Index Gas Stop Expected return 10% 8% 12% Standard deviation 14% 16% 29% Beta 1.1 0.7 Risk-free rate 2% 2% 2% 1 (a) Evaluate the covariance and correlation coefficient of Gas Stop with the market. (5 marks) (6) Since the returns on the current portfolio resemble the returns on a broad market index, we can approximate the correlation of returns between the current portfolio and Gas Stop to be the same as that between Gas Stop and the market. Analyse if the addition of Gas Stop to the existing portfolio improves the Sharpe ratio. Rp Ri Sharpe Ratio = op Rys Return of portfolio Standard devono porto's excess retum If yes, propose the recommended allocation to Gas Stop and his existing portfolio. Analyse other benefits that can be expected if Gas Stop is added into the portfolio. (20 marks)