The ordinary shares of both Armour PLC and Barbary PLC are quoted on the stock

exchange. The following information about each of these shares is available:

Expected return E$($R$)$ Standard deviation of returns $(\backslash$sigma R$)$

Armour PLC $10\%4\%$

Barbary PLC $15\%9\%$

$/$

The correlation between the returns on the two shares is $+0\mathrm{.}2.$

Required:

An investor with $10,000$ to invest has decided to form a two$-$security portfolio. The

investor wishes to invest $40\%$ of their funds in shares of Armour PLC and the remaining

$60\%$ in shares of Barbary PLC$.$ Calculate the expected return and the standard deviation

risk of this portfolio.

q$2.$ Roza Ltd$.$ is a Galway$-$based company which will make a payment of US$$570,000$ to a

supplier in the USA one year from now. The following information is available:

$$ The spot exchange rate today is US$$1\mathrm{.}16=1.$ For one year forward contracts, the

US$ is at a premium of US$$0\mathrm{.}02.$

$$ Roza Ltd$.$ can borrow or lend money in either US$ or $.$ The interest rates for one

year are $1\%($for US$ loans and deposits$)$ and $5\%($for $$ loans or deposits$).$

Required:

Roza Ltd$.$ has decided to hedge its foreign currency exposure in relation to this

forthcoming payment using either a forward contract or a money market hedge. Which

of these methods of hedging do you recommend? Provide detailed calculations to

support your answer.