Dubai Bank, an all equity bank plans to expand into Kenya by building a subsidiary. Expected payoff
Question:
Dubai Bank, an all equity bank plans to expand into Kenya by building a subsidiary. Expected payoff from the Kenyan investment will depend on the future of its economy as follows; state of economy is E1, E2, E3, E4. probability of each state of economy is E1=0.1, E2=0.2, E3=0.5, E4=0.2, expected return for each state of economy is E1=0.1, E2=0.2, E3=0.1, E4=0.2. The Bank will generate a return of 30% with standard deviation of 14%. The correlation coefficient of the bank's returns with returns of the Kenyan investment is -30%. The bank's return has a correlation coefficient of 80% with the return on the market portfolio, while the Kenyan investment has a correlation coefficient of -10% with the Emirates market portfolio. The Beta coefficient of the Bank is 1.20 and the return on Emirates 91-day Treasury bill is 12%. The risk premium on the UAE20 share index is 15% and Dubai Bank shares are correctly priced. (a) Compute the expected rate of return and standard deviation of the return of the Kenyan investment. (b) If Kenyan investment capital funding equal to 25% of the value of Dubai Bank's assets, compute the risk-return chacteristics of the bank after the investment. (c) What effect will the implementation of the planned investment have on the Beta of Bank ignoring all taxes