Question: You are a share analyst employed by a large multinational investment fund and have been supplied with the following information: Asset Expected Return (%) Standard

You are a share analyst employed by a large multinational investment fund and have been supplied with the following information:

Asset Expected Return (%) Standard Deviation (%)

BHZ 9.0 8.0

ANB 13.0 48.0

You are also told that the correlation coefficient between the returns of the two firms is 0.80. A client currently has all of her wealth invested in BHZ shares. She wishes to diversify her portfolio by redistributing her wealth such that 30 percent is invested in BHZ shares and 70 percent in ANB shares.

Part A: Calculated following and please show your working steps, formulas, and calculation in detail.

a. What will be the expected return of the new portfolio?

b. What will be the standard deviation of returns for the new portfolio?

Part B: After constructing the portfolio and reporting the results to your client, she is quite upset, saying "I thought the whole purpose of diversification was to reduce risk? Yet you have just told me that the variability of my portfolio has actually increased from what it was when I invested only in BHZ"

Provide a response to your client that demonstrates how the new portfolio does or does not reflect the benefit of diversification.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

For each transaction, indicate in which journal it should be recorded. Sales Journal Cash Receipts Journal Purchases Journal Cash Payments Journal General Journal Returned products to a supplier....

Question: What as the average weekly safety inventory level of refined sugar from the beginning January 2022 to the end of July 2022? A. 512,465.9691 metric tons per week B. 316,002.1474 metric tons...

Consider the following information: Rate of Return if State Occurs State of Economy Boom :57 Bust of Economy .66 .34 Probability of State Stock A .09 .13 Stock B Stock C .03 .19 .24 -.04 a. What is...

The _________ is a checklist that is best suited for property and tangible asset tracking. Perils analysis Industry list List of assets The activity list

In multi-division corporations where division heads are allocated an annual budget, explain why the use-it-or-lose-it use-it-or-lose-it phenomenon occurs and is a reflection of a prisoners dilemma.

On January 1, 2010, Pierson Corporation exchanged $1,710,000 cash for 90 percent of the outstanding voting stock of Steele Company. The consideration transferred by Pierson provided a reasonable...

Define the purpose of neuropsychological testing.

The unadjusted trial balance of the Manufacturing Equitable at December 31, 2011, the end of its fiscal year, included the following account balances. Manufacturings 2011 financial statements were...

Total points: 15 Write a python program to search for occurrences of a pattern in a given dra sequence e.g. pattern = "gag" dna =...

Macroland is at the Steady State. Due to population aging, a portion of Macroland's labour force retires. At the same time, owing to its aging population, the saving rate declines in this country....

The S-N-curve for an elastic material is characterized by the Basquin relationship, = C.N where C is a material constant, is the stress amplitude, Nr is the number of fully-reversed- stress cycles to...

2. Write a clarifying statement for your top five prioritized values. Answer the question, "What does this value really mean to me?" If you were living that value perfectly, what would your behaviour...

When a failure-to-extract malfunction is experienced in the AR platform, the barrel must be removed in order to properly replace the extractor

X; as an estimate of the population mean Problem 7. (10 POINTS) WEIGHTED SAMPLE MEAN In lectures, we discussed the sample mean X = =i. Let us consider a more general class of estimators: n X = wiXi,...

a ) Simplify this distributed load to an equivalent load / s . b ) Solve the reactions at A and B . and draw FBD of equivalent loading? 6 kN/m 9 kN/m 00 1.5 m 2 m 3.5 m

What are the first four future dividends in stage 1? Round your answer off to TWO decimal places. (ex: If you got $1 from your calculation, then your answer must be $1.00. If you got $383.876 from...

State whether each statement is true or false. If false, give a reason. {purple, green, yellow} = {green, pink, yellow}

9.50 Decision errors in prostate cancer detection In the year 2016, approximately 181,000 new prostate cancer cases were expected to be diagnosed in the United States and approximately 26,100 deaths...

9.41 Sensitivity study Ideally, results of a statistical analysis should not depend greatly on a single observation. To check this, its a good idea to conduct a sensitivity study. This entails...

9.31 Photovoltaic solar energy in Europe According to Eurostat, the yearly growth rate of renewable energy production from photovoltaic cells is, on average, 1.65 in Europe and 1.57 in Germany....