Question
Question B-1 (Total= 10 marks) David is considering the following investments: X, Y and Z: Probability of return (%) Likely Return X (%) Likely Return
Question B-1 (Total= 10 marks) David is considering the following investments: X, Y and Z: Probability of return (%) Likely Return X (%) Likely Return Y (%) Likely Return Z (%) 20 6 4 9 30 9 7 14 40 16 10 19 10 18 14 26 (a) Calculate the expected return for each asset. (3 marks)
Expected return=Sum(probabilityreturns)
Expected Return, X=(0.2*0.06)+(0.3*0.09) +(0.4*0.16) +(0.1*0.18)= 0.121=12.10%
Expected Return, Y=(0.2*0.04)+(0.3*0.07) +(0.4*0.10) +(0.1*0.14)= 0.83=8.30%
Expected Return, Z=(0.2*0.09)+(0.3*0.14)+(0.4*0.19)+(0.1*0.26)= 0.162 =16.20%
So, the expected return for X = 12.1%, Y = 8.3% and Z = 16.2%
(b) Calculate the expected return on a portfolio comprising each asset weighted as follows (3 marks) Asset Weighting (%) Weighting (%) X 20 Y 55 Z 25 The expected return on the portfolio: (0.2*0.121) +(0.55*0.83) +(0.25*0.162) = 0.11035 =11.035%
(c) Explain to Darren the benefit of combining the assets into a portfolio instead of undertaking individual investments in X, Y and Z (4 marks)
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