TOPIC: PORTFOLIO THEORY AND CAPITAL ASSET PRICING MODEL (RETURN AND RISK)

c. The department's management of Beyazid Bhd proposes to use Portfolio Theory to determine which two (2) projects should be undertaken, based upon an analysis of each project's risk and return. Below is the information about the expected returns, standard deviation, covariance and correlation of the proposed projects: Projects Covariance Project 1 & 2 Project 2 & 3 Project 3 & 1 Expected returns 14.70 11.55 13.95 Standard deviations 4.825 1.996 3.873 0.2642 0.0568 0.1198 Correlati on 0.0210 0.0676 0.05 i. Based on the information above, discuss and evaluate which two (2) projects should be undertaken by Beyazid Bhd's management assuming that the management team are very conservative in making decision. (3 marks) ii. Assuming that the current market condition is categorised as depression, advise Beyazid Bhd's on the investment portfolio should be chosen. (2 marks)