The management of Gawain plc is evaluating two projects whose returns depend on the future state of the economy as shown below Probability IRRA( ) IRRB( ) 0 3 27 35 0 4 18 15 0 3 5 20 The project (or projects) accepted would double the size of Gawain Required (a) Explain how a portfolio should be constructed to produce an expected return of 20 percent (b) Calculate the correlation between projects A and B, and assess the degree of risk of the portfolio in (a) (c) Gawain 's existing activities have a standard deviation of 10 per cent How does the addition of the portfolio analysed in (a) and (b) affect risk

Question: The management of Gawain plc is evaluating two projects whose returns depend on the future state of the economy as shown below: Probability __________ IRRA(%)

The management of Gawain plc is evaluating two projects whose returns depend on the future state of the economy as shown below:
Probability __________ IRRA(%) ___________ IRRB(%)
0.3...............................27 ...........................35
0.4...............................18............................15
0.3.................................5...........................20
The project (or projects) accepted would double the size of Gawain.
Required
(a) Explain how a should be constructed to produce an of 20 percent.
(b) Calculate the correlation between projects A and B, and assess the degree of risk of the in (a).
(c) Gawain's existing activities have a standard deviation of 10 per cent. How does the addition of the analysed in (a) and (b) affect risk?

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