question archive (a) You are supplied with the following information
(a) You are supplied with the following information
Subject:FinancePrice:3.86 Bought15
(a) You are supplied with the following information. Probability 0.1 0.2 Kazim plc: expected return 5% -5% 8% 10% 14% Sibley plc: expected return -5% 8% 12% 16% 19% 0.4 0.25 0.05 You are also told that the correlation coefficient between the returns of the two companies' shares is 0.380. Required: (1) (2) (3) Calculate the expected average return of the two shares. Calculate the standard deviation of the two shares' returns. Calculate the risk and return of a two-share portfolio which consists of 60% of Kazim's shares and 40% of Sibley's shares. (10 marks)
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Answer to the question Probability (W) Kazim Plc (X) Sibley Plc (Y) Expected retrun of Kazim (W*X) Expected retrun of Sibley (W*y) SD of Kazim (X-X') SD of Sibley (Y-Y') 0.10 5 -5 0.50 -0.50 -0.90 -15.85 0.20 -5 8 -1.00 1.60 -10.90 8.00 0.40 8 12 3.20 4.80 2.10 12.00 0.25 10 16 2.50 4.00 4.10 16.00 0.05 14 19 0.70 0.95 8.10 19.00 5.90 10.85 2.50 39.15 Part a) Expected return of Kazim i.e. X' = 5.90% Expected return of Sibley i.e. Y' = 10.85% Part b) SD of Kazim = 2.50 SD of Sibley = 39.15 Part c) Expected return of portfolio = (0.60*5.90%)+(0.40*10.85%) = 7.88% Expected SD = Square root of - {(Weight of share 1)^2 * (Variance of share 1) + (Weight of share 2)^2 * (Variance of share 2) + 2* weight of share 1* weight of share 2* correlation * SD of 1* SD of 2 } Variance of Kazim = 6.25 Variance of Sibley = 1532.72 Expected Risk i.e.SD = (0.6)^2*(6.25) + (0.4)^2* 1532.72 + 2*0.6*0.4*0.38*2.50*39.15 16.29
