Westminster International University in Tashkent Corporate Finance 4econ009C-n 2021/2012, Semester 2

Required: Using the information from part B, find the expected return on stocks Rosy Corporation and Daisy Industries considering 50% investment in each.

Expected return on portfolio

E_p ( =0.5*0.1957+0.5*0.1989=0.1973 or 19.73%
What is the risk of this portfolio given a correlation coefficient of 0.6?






_p = 0.5²*0.1449²+0.5²*0.11²+2*0.5*0.5*0.6*0.1449*0.11=0.0052+0.0030+0.0048= =0.114 or 11.4%
What would happen if you changed the investment allocation as 30% to Rosy Corporation and 70% to Daisy Industries?

E_p( )= 0.3*0.1957+0.7*0.1989=0.1979 or 19.8%

_p=0.3²*0.1449²+0.7²*0.11²+2*0.3*0.7*0.6*0.1449*0.11=0.0019+0.0059+0.0040= = 0.1086 or 10.86%

8. 
   Jack Ma invests the following sums of his salary in common stocks having expected returns as shown below:
   

Common stock Amount invested Possible return
Warner Bros 10 000 15%
Paramount 8000 16%
DreamWorks 9000 12%
Pixar 7000 14%


Required: find the expected return of his portfolio. What would be his expected return if he doubled his investment in Warner Bros while leaving everything else same?


Answer. First find the total investment amount and weights of investments in each stock.
Total investment: 34 000
Warner Bros: 10 000/34000 = 0.294 or 29.4%
Paramount: 8000/34000 = 0.235 or 23.5%
DreamWorks: 9000/34000 = 0.265 or 26.5%
Pixar: 7000/34000 = 0.206 or 20.6%

E(R) portfolio = 0.294*0.15+0.235*0.16+0.265*0.12+0.206*0.14 = 0.1423 or 14.23%

If doubled the investment in Warner Bros, then total investment is 34000+10000=44 000. Then the weights are:

Warner Bros: 20 000/44000 = 0.455 or 45.5%
Paramount: 8000/44000 = 0.181 or 18.1%
DreamWorks: 9000/44000 = 0.204 or 20.4%
Pixar: 7000/44000 = 0.160 or 16%


E(R) portfolio = 0.455*0.15+0.181*0.16+0.204*0.12+0.160*0.14 = 0.1440 or 14.4%