The management of gawain plc is evaluating two projects


The management of Gawain plc is evaluating two projects whose returns depend on the future state of the economy as shown below:

The project (or projects) accepted would double the size of Gawain.

Required

(a) Explain how a portfolio should be constructed to produce an expected return of 20 per cent.

(b) Calculate the correlation between projects A and B, and assess the degree of risk of the portfolio in (a).

(c) Gawain's existing activities have a standard deviation of 10 per cent. How does the addition of the portfolio analysed in (a) and (b) affect risk?

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