Question 1: Portfolio valuation
Consider shares in two companies, JAY and KAY, as follows:
|
Expected Return E(R)
|
Standard Deviation s
|
Correlation Coefficient r
|
|
Share JAY
|
12%
|
18%
|
- 0.3
|
|
Share KAY
|
24%
|
32%
|
|
a) Calculate the covariance between Share JAY and KAY returns.
b) What is the expected return and standard deviation of returns on a portfolio comprising 35% in Share JAY and 65% in Share KAY?
c) If you wanted to create a portfolio consisting only of these two shares, how much would you need to invest (weights) in each share so that your portfolio return would be equal to 15.6%? Note: do not round.
d) Using the weights calculated in part c), calculate the variance and standard deviation of your portfolio.