Question
The shares of two companies, TEC PLC, and BIO PLC, have the following expected returns and standard deviations: For TEC PLC: ER (%) = 10
The shares of two companies, TEC PLC, and BIO PLC, have the following expected returns and standard deviations:
For TEC PLC:
ER (%) = 10
SD (%) = 25
For BIO PLC:
ER (%) = 24
SD (%) = 46
Assume that the coefficient of correlation between the returns of the two companies can take following values: Correlation Coefficient (P) = -1, -0.75, -0.5, -0.25, 0, 0.25, 0.5, 0.75, 1
A) Assume you are an investor looking to invest in a portfolio consisting of the shares of the two companies mentioned above. Suppose you have £1,000,000 to invest and you vary the weight of each share in steps of 5% of the total amount invested such that all your money is invested in this portfolio. For each of the correlation coefficients mentioned above, produce the following:
i) Table of expected return of the portfolio corresponding to each weight pair.
ii) Table of standard deviation of portfolio returns.
iii) The weights of each share required for achieving minimum variance portfolio.
iv) The risk and return of the minimum variance portfolio.
v) Plot mean-standard deviation frontier corresponding to each correlation coefficient on a risk-return diagram.
vi) Identify the minimum variance portfolio on the mean-standard deviation frontier.
vii) Identify and describe the efficiency frontier in relation to the mean-standard deviation frontier plot obtained in part (vi).
viii) Discuss in detail the concept of diversification in the context of the correlation coefficients mentioned above.
b) Describe the term market portfolio and explain how it relates to the idea of a risk premium on risky assets.
Step by Step Solution
3.52 Rating (165 Votes )
There are 3 Steps involved in it
Step: 1
A Lets analyze the portfolio consisting of TEC PLC and BIO PLC shares for each correlation coefficient value i Table of expected return of the portfolio corresponding to each weight pair Correlation C...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started