Question
You are an investor who has currently has a $750,000 portfolio consisting entirely of an investment in the shares of Company A Ltd. You are
You are an investor who has currently has a $750,000 portfolio consisting entirely of an investment in the shares of Company A Ltd. You are considering selling some of your existing portfolio and investing those proceeds into the shares of Company B Ltd. Following that transaction, the total value of your investment in shares in Company A will be twice that of your investment in Company B. You estimate that the correlation coefficient between the returns of the shares of company A and the shares of company B is 0.70. Details of the returns and variability of those returns are as follows:
Shares of company A: Expected Return 0.15, Standard deviation of returns 0.25 Shares of company B: Expected Return 0.20, Standard deviation of returns 0.40
a) What is the value of your investment in the shares of Company A and Company B immediately after the transaction? What weights do these represent in your portfolio? b) What is the expected return of your portfolio following the purchase of shares in Company B? [express as a percentage with the final answer correctly rounded to two decimal places e.g. 50.67% p.a.] c) What is the standard deviation of the returns from your portfolio following the purchase of shares in Company B? [express as a percentage with the final answer correctly rounded to two decimal places e.g. 50.67% p.a.] d) At dinner that night you tell your friend who is doing a marketing major about your wheelin n dealin. Your friend says Yeah thats pretty cool, but its a shame you didnt diversify away any risk while you were at it. Youve actually taken on additional risk!. In no more than 8 lines reply to your friend clearly stating whether you agree or disagree with their statements.
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