QUESTION FIVE

Kawangware ltd is considering investment in three possible projects for the next year. Each project has a one year life span and project return depend on the next years state of the economy. The estimated rates of return are shown below.

State of economy Probability Rate of Return (%)

A B Market

Average 0.30 10 10 15

Recession 0.45 15 14 12

Boom 0.25 16 18 10

Required;

1. Expected returns for A, B and the market (3marks)
2. What would be the portfolio return in the company invested 60% of its funds in A and 40% in B? (3marks)
3. Compute the portfolio variance and standard deviation (10marks)

Compute portfolio beta.

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