Question

In: Finance

An investor has an investment capital of Sh.2,000,000. He wishes to invest in two securities, A...

An investor has an investment capital of Sh.2,000,000. He wishes to invest in two securities, A and B in the following proportion; Sh.400,000 in security A and Sh.1, 600,000 in security B.

The returns on these two securities depend on the state of the economy as shown below:

State of Economy

Probability

Return on Security A

Return on security B

Boom

0.4

18%

24%

Normal

0.5

14%

22%

Recession

0.1

12%

21%
  1. Compute the expected portfolio return
  2. Determine the correlation coefficient between security A and Security B and interpret it.
  3. Calculate the portfolio risk as measured by standard deviation.

Solutions

Expert Solution

A. Expected return of the portfolio = 19.78%

B. Correlation coefficient=+1.
It means that both the stocks are perfectly co-related to each other. It means a change in the return of A is directly proportional to change in return of B. The both move in the same direction.

C. Standard deviation of the portfolio =2.37%

jeff jeffy answered 2 weeks ago
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