Question

Kamet is an investment fund that invests on the Ghana Stock Exchange. In recent times the economy has gone through four different cycles which analyst believe may be repeated in the years ahead. Kamet is reviewing its investment strategy and is looking for the best way to make good returns for its clients. The returns on three assets selected by Kamet are provided below: Business Cycle Probability Unilever Starwin Anglogold Normal 0.30 40% 40% 30% Boom 0.40 20% 45% 40% Near Recession 0.10 20% 30% 15% Recession ??? 12% 50% 30% You are required to: Compute the expected return and risk of each asset and advise Kamet as to which asset to invest more funds in on the basis of: expected return on the assets riskiness of the assets (Hint: compute the coefficient of variation of each asset and select the asset with the lowest coefficient of variation; CV= δ/(E(R))) Kamet has just informed you of three strategies (a), (b) and (c) that it wants to use. In this strategy, Kamet will invest in the order of expected return hence the highest proportion of its funds is to be invested starting from the asset that yields the highest expected return irrespective of the risk level. The order is as follows: Assets 1st Measured by Return 2nd Measured by Return 3rd Measured by Return Percentage of funds invested 45% 35% 20% (b). In this strategy, Kamet will invest in the order of riskiness of the assets hence the highest proportion of its funds is to be invested starting from the assets with the lowest risk irrespective of the expected return. The order is as follows. Assets 1st Measured by Risk 2nd Measured by Risk 3rd Measured by Risk Percentage of funds invested 50% 30% 20% (c). In this strategy, Kamet will invest in the order shown below Assets Unilever Starwin Anglogold Percentage of funds invested 30% 30% 40% Compute the portfolio expected return for each of the strategies (a), (b), and (c) and advise Kamet as to the best strategy to select on the basis of the expected return you have computed.

Answer 1

		Asset 1	Unilever
		Asset2	Starwin
		Asset3	Anglogold
			Analysis of Asset 1:Unilever	P	R	A=P*R	D=R-24.4	E=(D^2)	V=E*P
			Business Cycle	probability	Return(Percentage)	Probability*Return	Deviation from Mean	Deviation Squared	Deviation Squared*Probability
			Normal	0.3	40	12	15.6	243.36	73.008
			Boom	0.4	20	8	-4.4	19.36	7.744
			Near Recession	0.1	20	2	-4.4	19.36	1.936
	Probability	(1-0.3-0.4-0.1)	Recession	0.2	12	2.4	-12.4	153.76	30.752
					SUM	24.4			113.44
		R1	Expected Return (Mean)of Asset1	24.4	%
		V1	Variance of Asset 1	113.44
		S1=SQRT(V1)	Standard Deviation of Asset 1	10.65	%
		CV1=S1/R1	Coefficient of Variation of Asset 1	0.4365091
			Analysis of Asset 2:Starwin	P	R	A=P*R	D=R-43	E=(D^2)	V=E*P
			Business Cycle	probability	Return(Percentage)	Probability*Return	Deviation from Mean	Deviation Squared	Deviation Squared*Probability
			Normal	0.3	40	12	-3	9	2.7
			Boom	0.4	45	18	2	4	1.6
			Near Recession	0.1	30	3	-13	169	16.9
		(1-0.3-0.4-0.1)	Recession	0.2	50	10	7	49	9.8
					SUM	43.0		SUM	31
		R2	Expected Return (Mean)of Asset2	43	%
		V2	Variance of Asset 2	31
		S2=SQRT(V2)	Standard Deviation of Asset 2	5.57	%
		CV2=S2/R2	Coefficient of Variation of Asset 2	0.1294829
			Analysis of Asset 3:Anglogold	P	R	A=P*R	D=R-32.5	E=(D^2)	V=E*P
			Business Cycle	probability	Return(Percentage)	Probability*Return	Deviation from Mean	Deviation Squared	Deviation Squared*Probability
			Normal	0.3	30	9	-2.5	6.25	1.875
			Boom	0.4	40	16	7.5	56.25	22.5
			Near Recession	0.1	15	1.5	-17.5	306.25	30.625
		(1-0.3-0.4-0.1)	Recession	0.2	30	6	-2.5	6.25	1.25
					SUM	32.5		SUM	56.25
		R3	Expected Return (Mean)of Asset3	32.5	%
		V3	Variance of Asset 3	56.25
		S3=SQRT(V3)	Standard Deviation of Asset 3	7.50	%
		CV3=S3/R3	Coefficient of Variation of Asset 3	0.2307692
				Expected Return(%)	Standard Deviation(%)	Coefficient of Variation
		Asset 1	Unilever	24.4	10.65	0.436509081	Highest CV
		Asset2	Starwin	43	5.57	0.129482892	Lowest CV
		Asset3	Anglogold	32.5	7.50	0.230769231
			On the basis of Expected Return & Riskiness of Assets
			Most fund in Starwin, Least in Unilever
			Strategy (a): Order of expected Return
				w		R	w*R
	Strategy(a)	Asset	Company	Weight		Expecred Return	Weight *Expected Return
		Asset 1	Unilever	0.2	w1	24.4	4.88
		Asset2	Starwin	0.45	w2	43	19.35
		Asset3	Anglogold	0.35	w3	32.5	11.375
						SUM	35.61	%

We were unable to transcribe this image

Portfolio ExpectedR eturn Strategy (a): Order of expected Return Strategy (b): Order of Riskiness Strategy (c); 35.61 % 36.13 % 33.22 % Recommendation: Strategy (b) is recommended The portfolio returnis highest Allocation based on riskiness This strategy also meets the criterian of most fund toleast CV (Starwin)