The following table provides the share return forecasts
The following table provides the share return forecasts and associated probabilities for ABB Limited and BAA Limited. Answer parts a. to c. using the information provided. Detailed worked solutions must be presented in your answers, including formulae used, progressive and final answers to the questions.
ABB Limited | BAA Limited | |||
Return (%) | Probability (%) | Return (%) | Probability (%) | |
15.5 | 50 | 20.3 | 50 | |
12.0 | 20 | 10.5 | 20 | |
9.5 | 30 | 7.0 | 30 | |
a. Calculate the expected return on each share.
b. Calculate the variance and standard deviation for each share.
c. Suppose a portfolio comprised of 70% investment in ABB Limited and 30% investment in BAA Limited can be constructed. An analyst has estimated that the correlation coefficient of the two-asset portfolio is -0.30, calculate the return and standard deviation of this portfolio. Compare your answer with those reported in parts a. and b. and draw your conclusion.
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Solution: The following table provides the share return forecasts