Megan Clarke has a full diversified portfolio currently valued at €100,000. She subsequently inherits Carworks stocks...
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Megan Clarke has a full diversified portfolio currently valued at €100,000. She subsequently inherits Carworks stocks from a generous Aunt which is worth €20,000. Her financial adviser provides her with the following forecasted information on the expected risks and returns of her portfolio and the Carworks stock.
|
Expected Return |
Expected Standard Deviation |
|
|
Original Portfolio |
5.35% |
18.75% |
|
Carworks Shares |
6.25% |
20.05% |
The correlation between Carworks returns and the original portfolio returns is currently 0.65 and this is expected to continue. The inheritance changes Megan’s overall portfolio.
Calculate
a. the new expected return of her portfolio including the Carworks stock
b. the covariance of Carworks returns with the original portfolio returns
c. the standard deviation of the new portfolio, including the Carworks stock
d. Comment briefly on the standard deviation of the new portfolio versus that of the original portfolio.
(17 marks)
2. If you were an investment manager of a public sector pension fund what assets would you include in your portfolio and what risks would be of most concern to you in the current environment? (16 marks)
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Megan Clarke has a full diversified portfolio currently valued
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