The following table provides the share return forecasts and associated probabilities for Advanced Limited and Bright Limited.
Advanced Limited Bright Limited
Return (%) Probability (%) Return (%) Probability (%)
15.5 30 20.3 20
12 30 10.5 50
9.5 40 7 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 60% investment in Advanced Limited and 40% investment in Bright Limited can be constructed.
An analyst has estimated that the correlation coefficient of the two-asset portfolio is -0.50, calculate the return and standard deviation of this portfolio. and draw your conclusion.
Compare your answer with those reported in parts a. and b.
The solution discusses the share return forecasts and associated probabilities for Advanced Limited and Bright Limited.