Question
You are presented with the following information relating to the expected performance of the stock of company E after one year: Returns E 100 120
You are presented with the following information relating to the expected performance of the stock of company E after one year:
Returns E | 100 | 120 | 130 | 150 | 180 | 220 |
Probability | 0.05 | 0.14 | 0.2 | 0.36 | 0.2 | 0.05 |
a) Determine the expected return, the standard deviation of returns and coefficient of variation for the above stock.
b) Suppose you have decided to invest in the above stock, based on the values computed in (a). However, you have read in the financial press about the risk reduction benefits of diversification and decided to combine stock E with other securities. Your Financial Analyst has provided you with the following information relating to two stocks of companies K and L. Further the correlation coefficients between the returns on pair-wise combinations of the two securities are provided:
Security | Expected return | Standard deviation | Correlation | Correlation |
K | 250 | 50 | 0.5 | |
L | 80 | 10 | 0.1 | -0.2 |
i) Mr. PY has N$ 2 000 000- 00 to invest in a portfolio that is made up of three securities E, K and L. He has indicated that he wants to invest N$ 1 000 000-00 is K security and an equal proportion in E and L securities. Calculate the risk of this portfolio.
ii) Suppose that a certain investor wants to invest in securities K and L. Construct the weights of the minimum variance portfolio and show that its risk is close to zero.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
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