Problem:
The following table provides the share return forecasts and associated probabilities for Advanced Limited and Bright Limited.
Advanced Limited Bright Limited
Return (%) Probability (%) Return (%) Probability (%)
15.5 30 20.3 20
12 30 10.5 50
9.5 40 7 30
a. Calculate the expected return on each share.
b. Calculate the variance and standard deviation for each share.
c. Suppose a portfolio comprised of 60% investment in Advanced Limited and 40% investment in Bright Limited can be constructed.
An analyst has estimated that the correlation coefficient of the two-asset portfolio is -0.50, calculate the return and standard deviation of this portfolio. and draw your conclusion.
Compare your answer with those reported in parts a. and b.