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Mr. Appiah has GHS 200,000 for investment. In order to diversify his risk Mr. Appiah is...

Mr. Appiah has GHS 200,000 for investment. In order to diversify his risk Mr. Appiah is considering two options:

Portfolio 1: Invest GHS 100,000 in A , GHS 80,000 in B and GHS 20,000 in C

Portfolio 2: Invest GHS 50,000 in A and GHS 70,000 in B and GHS 80,000 in C

If the correlation coefficient between the return of A and B is -0.8; A and C is 0.2 and B and C is 0.3

Calculate the expected return and the risk of the two portfolios and advise.      (7 Marks)
How Much investment is needed for A and B to achieve the minimum variance
portfolio?                                    

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Answer #1

Correlation between two variables is positive , it means that one variable increase with another in above situation A and C is 0.2 which state that is positive condition with increase values. B and C is 0.3 which is also positive but greater than A and C. In both condition "C" is positive so the investment ratio of C is good 50000 and 50000is needed for A and B to achive minimum variances portfolio

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