Lucky FC Ltd wants to invest in two projects, namely, A & B. The expected return on projects A & B are 12% and 20% respectively while the risk associated with project A is 13% and that of B is 7%. Lucky FC Ltd planned to invest 80% of its available funds in project A and the remaining in project B. The correlation coefficient between the returns of the projects is -0.10. Required 1) Estimate the returns from the proposed portfolio of projects A & B 2) Calculate the risk of the portfolio 3) Suppose the correlation coefficient between A & B was -1.0. How should the club invest its funds to achieve a zero-risk portfolio?
Lucky FC Ltd wants to invest in two projects, namely, A & B. The expected return on projects A & B are 12% and 20% respectively while the risk associated with project A is 13% and that of B is 7%. Lucky FC Ltd planned to invest 80% of its available funds in project A and the remaining in project B. The correlation coefficient between the returns of the projects is -0.10. Required 1) Estimate the returns from the proposed portfolio of projects A & B 2) Calculate the risk of the portfolio 3) Suppose the correlation coefficient between A & B was -1.0. How should the club invest its funds to achieve a zero-risk portfolio?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 15P
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Lucky FC Ltd wants to invest in two projects, namely, A & B. The expected return on projects A & B are 12% and 20% respectively while the risk associated with project A is 13% and that of B is 7%. Lucky FC Ltd planned to invest 80% of its available funds in project A and the remaining in project B. The correlation coefficient between the returns of the projects is -0.10.
Required
1) Estimate the returns from the proposed portfolio of projects A & B
2) Calculate the risk of the portfolio
3) Suppose the correlation coefficient between A & B was -1.0. How should the club invest its funds to achieve a zero-risk portfolio?
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