a. Calculate both the arithmetic and the geometric average return of the following investment;
Year 1 2 3 4
Return 10.5% 12.2% -5.5% 2.8%
(4 marks)
b. Teena is considering investing in Stock A and stock B. She plans to invest $ 25,000 in the low risk
stock and $ 50,000 in the high-risk stock. You have been given the following information about these
two stocks in the table below:
Stock A B
E(R) 15% 10
? 25% 22%
Correlation between A and B 0.20
Based on the given information above, you are required to:
i. Calculate the portfolio weights
ii. Calculate the portfolio return.
iii. Calculate the portfolio risk.
iv. Compare portfolio risk with the individual stock risks and identify the benefit of the
diversification of the portfolio.
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