An Australian portfolio manager is considering increasing the diversification of her portfolio by investing in foreign mutual funds from Canada and Portugal with the following features: Australia Canada Portugal Expected return 14% 11% 7% Standard deviation 10% 9% 6% Correlation with 1.0 0.40 0.05 Australia a) Compute the expected return and standard deviation of the following portfolios: Portfolio A: 25 per cent Canada, 75 per cent Australia Portfolio B: 25 per cent Portugal, 75 per cent Australia Portfolio C: 50 per cent Canada, 50 per cent Australian Portfolio D: 50 per cent Portugal, 50 per cent Australia Portfolio E: 75 per cent Canada, 25 per cent Australia Portfolio F: 75 per cent Portugal, 25 per cent Australia b) Based on the above data above, which country seems to offer the best diversification potential for Australian investors? c) If you were risk averse, which foreign mutual fund would you add to your Australian portfolio? What percentage of your funds would be invested in that foreign fund? Assume that you own a portfolio similar to the Australian fund shown above.

An Australian portfolio manager is considering increasing the diversification of her portfolio by investing in foreign mutual funds from Canada and Portugal with the following features: Australia Canada Portugal Expected return 14% 11% 7% Standard deviation 10% 9% 6% Correlation with 1.0 0.40 0.05 Australia a) Compute the expected return and standard deviation of the following portfolios: Portfolio A: 25 per cent Canada, 75 per cent Australia Portfolio B: 25 per cent Portugal, 75 per cent Australia Portfolio C: 50 per cent Canada, 50 per cent Australian Portfolio D: 50 per cent Portugal, 50 per cent Australia Portfolio E: 75 per cent Canada, 25 per cent Australia Portfolio F: 75 per cent Portugal, 25 per cent Australia b) Based on the above data above, which country seems to offer the best diversification potential for Australian investors? c) If you were risk averse, which foreign mutual fund would you add to your Australian portfolio? What percentage of your funds would be invested in that foreign fund? Assume that you own a portfolio similar to the Australian fund shown above.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question Sun Plc has been specially formed to undertake two investment opportunities. The risk and return characteristics of the two projects are shown below: X Y Expected Return 10% 20% Risk (standard deviation) 4% 7% Sun plans to invest 60% of its available funds in Project X and 40% in Project Y. The directors believe that the correlation coefficient between the returns of the projects is +0.18. Required: i. Calculate the expected return from the proposed portfolio of Projects X and Y. ii. Calculate the risk of the portfolio and comment upon your result in the context of the risk reduction effect of diversification. iii. How could Sun Plc invest its funds in order to obtain a minimum-risk portfolio? -----
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The book I use for study: Principles of Managerial Finance [Global Edition] 16th Edition. Chad J. Zutter & Scott B. Smart Questions in image
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