Question: The management of Gawain plc is evaluating two projects whose returns depend on the future state of the economy as follows: Probability IRR - Project

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

Probability

IRR - Project A (%)

IRR - Project B (%)

0.3

25

40

0.4

20

20

0.3

10

25

Acceptance of the project(s) would double the size of Gawain .

a. What is the he expected return from project A and B ?

b. To achieve an expected overall portfolio return of 20%, how much is the percentage of the portfolio that should be invested in project A?

c. What is the standard deviation of the return on project A and B?

d. What is the covariance of the returns on projects A and B?

e. Assuming a portfolio weighting of 83% for project A, what is the standard deviation of the return on an investment portfolio of projects A and B?

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