(a) Mr Adani invests in two risky securities with the following details: Security 1: r₁=0.16; ₁=0.30; Security 2:1₂=0.08; ₂=0.25 Where ₁ is the expected return of security 1 and ₁ is the standard deviation of returns of security 1; 1₂ is the expected return of security 2 and is the standard deviation of returns of security 2 The correlation coefficient (P12) between the returns of the two securities is -0.5 (i) Calculate the expected rate of return(r) and risk(o) for the following portfolios: 1.40% security 1 and 60% security 2 II.80% security 1 and 20% security 2 (ii) Given a risk-free rate of 4%, describe how Mr. Adani can use a combination of a risk- free instrument and a risky portfolio with an expected return of 15% to achieve an expected return of 26%.

(a) Mr Adani invests in two risky securities with the following details: Security 1: r₁=0.16; ₁=0.30; Security 2:1₂=0.08; ₂=0.25 Where ₁ is the expected return of security 1 and ₁ is the standard deviation of returns of security 1; 1₂ is the expected return of security 2 and is the standard deviation of returns of security 2 The correlation coefficient (P12) between the returns of the two securities is -0.5 (i) Calculate the expected rate of return(r) and risk(o) for the following portfolios: 1.40% security 1 and 60% security 2 II.80% security 1 and 20% security 2 (ii) Given a risk-free rate of 4%, describe how Mr. Adani can use a combination of a risk- free instrument and a risky portfolio with an expected return of 15% to achieve an expected return of 26%.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 16P

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(a) Mr Adani invests in two risky securities with the following details: Security 1: r1=0.16; 01-0.30; Security 2: r2=0.08; 2=0.25 Where r1 is the expected return of security 1 and o1 is the standard deviation of returns of security 1; r2 is the expected return of security 2 and o2is the standard deviation of returns of security 2 The correlation coefficient (p12) between the returns of the two securities is -0.5 (i) Calculate the expected rate of return(r) and risk(o) for the following portfolios: 1.40% security 1 and 60% security 2 II.80% security 1 and 20% security 2 I (ii) Given a risk-free rate of 4%, describe how Mr. Adani can use a combination of a risk-free instrument and a risky portfolio with an expected return of 15% to achieve an expected return of 26%.
5. You are considering investing in two securities, X and Y. The following data are available for the two securities: Security X Security Y Expected return 0.10 0.07 Standard deviation of returns 0.08 0.04 Beta 1.10 0.75
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