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Suppose an investor is considering to buy share in CDE Ltd and ABC Ltd, which has a market price Rs 250 and Rs 300 today

Suppose an investor is considering to buy share in CDE Ltd and ABC Ltd, which has a market price Rs 250 and Rs 300 today respectively.

CDE Ltd

ABC Ltd

Economic Conditions

Probability

Share Price

Dividend

Share Price

Dividend

%

Rs

Rs

Scenario 1

25

306

4

355

3

Scenario 2

75

287

5

345

2

The investor want to hold 40% of share in CDE Ltd and 60% in ABC Ltd’s shares for one year. Calculate the following:

  1. Individual expected return for each company
  2. Individual standard deviation for each company
  3. Expected return of portfolio based on the choice of the investor
  4. Standard deviation of portfolio based on the choice of the investor

Calculate the proportion that the investor should invest to achieve minimum variance portfolio.

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