Elsi is a risk-averse investor. She has invested 60% of her investment in share A and all the remainder in share B. Below are projections for the shares as well as the market.
A B Market
Expected return (%) 10 30 20
Standard deviation (%) 40 70 30
Correlations
A 1
B 0.2 1
Market 0.3 0.68 1

Required:
a) What are the expected return and standard deviation of returns on the portfolio?
b) The correlation between A and B is expected to be -1, what proportion should Elsi invest in A in order to form a minimum variance portfolio? Assume that she will invest only in A and B.
c) Elsi is wondering if beta is a more appropriate risk measure for the shares. Explain when beta is a more appropriate measure of risk than standard deviation.
d) Calculate the beta of A and B.
e) Construct a portfolio for Elsi. The portfolio will consist of shares A and B and have the same level of systematic risk as the market.
i) What will be the expected return and standard deviation of returns on the portfolio?
ii) Should Elsi invest in the portfolio? Explain why.

Answer rating: 100% (QA)

Calculation of Expected return and Standard deviation of the portfolio ... View the full answer