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The directors of Lancelot plc have evaluated the internal rates of return on two potential projects, whose returns depend on the future states of the
The directors of Lancelot plc have evaluated the internal rates of return on two potential projects, whose returns depend on the future states of the economy. Probability RRA IRRB State of the economy Full Brexit Partial Brexit No-Brexit 0.3 0.4 0.3 27% 18% 5% 35% 15% 20% If either project (or a combination of both) is accepted, the size of Lancelot plc will double. Required: (i) Explain how Lancelot could construct a portfolio of these two projects to produce an expected return of 20%? portfolio constructed in part (i) coefficient with the new project portfolio of 0.8, how does the adoption of the new (ii) Calculate the correlation between projects A and B, and evaluate the risk of the (iii) If Lancelot's existing activities have a standard deviation of 10% and a correlation project portfolio in (i) and (ii) affect Lancelot's risk
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