Principal of Finance

Question (30 marks)

You are provided the returns in percentage for shares A and B:

Year 2015 2016 2017 2018 2019 2020

Share A -9 16 5.5 -5 5 13

Share B 15 9 -10 4 -6 10.5

Required

a. Compute the average (expected) return and volatility (standard deviation) for shares A and B.

b. Determine the covariance and the correlation coefficient between returns on A and returns on B.

c. Calculate the expected return and standard deviation for a portfolio P of share A and share B, where the proportion invested in A is 50.28%.

d. A second portfolio Q also comprise share A and share B, where the proportion invested in A is 10.00%. Discuss which portfolio is efficient.

Note: To show all workings with accompanying explanations.

Word count requirement: 500. Minimum number of references: 2.