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Your company can invest in either, or both of two investments: Hitam Berhad shares and Putih Berhad shares. The expected returns on each of
Your company can invest in either, or both of two investments: Hitam Berhad shares and Putih Berhad shares. The expected returns on each of these two investments vary depending on economic conditions. The following table shows the expected returns and the likelihood of the economic conditions. Economic conditions Probability Recession Normal Boom i) ii) iii) iv) 15% 55% 30% Hitam Berhad Putih Berhad returns (%) returns (%) 10 12 16 a) If you invest in a portfolio comprising both shares, it will be 60% in Hitam Berhad, and 40% in Putih Berhad, calculate the average return for Hitam Berhad shares the average return for Putih Berhad shares the weighted return of Hitam and Putih shares the risk for Hitam Berhad shares the risk for Putih Berhad shares (5) 18 28 v) vi) the weighted risk for Hitam and Putih shares vii) the correlation between Hitam and Putih shares viii) the average return for portfolio. b) ix) the risk of the portfolio. (20 marks) Based on your response above, explain what occurred to the rate of return and risk when you moved from individual shares to a portfolio. (5 marks)
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