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? ‒‒‒‒‒
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? ‒‒‒‒‒
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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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