Kiwi traders have invested in two securities traded at the Nairobi Stock Exchange (NSE). Supposing A...

Kiwi traders have invested in two securities traded at the Nairobi Stock Exchange (NSE). Supposing A and B’s possible returns are as follows:

X=18%, 16%, 14%, 12%, 10%, 8%, 7%, 5%, 3% and 0% for periods one to ten.

Y=6%,7%,8%,9%,11%,13%,15%,17, %19%,19.5%, for periods one to ten, and each possible return has an equal chance in both cases. Other details remain the same.

Required

If Kiwi trader’s portfolio formation is Ksh 300,000, committing equal amounts in each asset, determine the Portfolio risk? (show working)

Solutions

Expert Solution

Standard deviation =

Covariance =

Correlation = Covariance / Stand. Dev X * Stand. Dev Y

Portfolio risk = [(Wx*Stand. Dev X)^2 + (Wy * Stand. Dev.Y)^2 + (2*Wx * Wy * Stand. Dev. x * Stand. Dev. y * cor(x,y) ] ^ (1/2)

Given amounts are equally invested so weights = 0.5

Risk = [(0.5*5.891%)^2 + (0.5*4.746)^2 + (2*0.5*0.5*5.891*4.746*0.8057)]^(1/2)

Portfolio Risk = 5.06%

jeff jeffy answered 1 year ago

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