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 that’s pretty cool, but it’s a shame you didn’t diversify away any risk while you were at it. You’ve 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.
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 that’s pretty cool, but it’s a shame you didn’t diversify away any risk while you were at it. You’ve 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.
Trending now
This is a popular solution!
Step by step
Solved in 6 steps
