Appendix: Formula sheet1. P12 =0120102Where P12: correlation coefficient between security 1 and security 2012: covariance between security 1 and security 2₁: standard deviation of security 10₂: standard deviation of security 22. 012 = 1 Pi [(R₁i — E (R₁)) ((R₂i – E(R₂)]-Where 12: covariance between security 1 and security 2P₁: probabilities of the return at i3.R₁i: rate of return of security 1 at iR₂i: rate of return of security 2 at iE (R₁) expected rate of return of security 1E (R₂) expected rate of return of security 202-012W1(min)+02-2012Where W₁(min): the weight of security 1 given the minimum variance in the twosecurities case012: covariance between security 1 and security 2₁: standard deviation of security 10₂: standard deviation of security 2o2: variance of security 24.02= w202 + w20₂ + 2w₁W₂010₂P12Where: variance of the portfoliow₁: weighting of security 1w₂: weighting of security 20₁: standard deviation of security 10₂: standard deviation of security 2P12: correlation coefficient between security 1and security 25. VaR (0) = P (ασνΔt - μΔt)Where P: investment positiona: one tailed probability of z valueσ: volatility (standard deviation)At: time horizon/holding periodμ: expected annual return(1+R₂) T(1+Rpv)TWhere F: risk adjusted factor6. F=-RPV: the cost of capital of the projectR₁: the risk free rate1-fdfu-fa'Where p: the probability of the cash flow Cu generated by the projectf and fa: deviation factorso: the standard deviationAt: time horizon of the project7. p=fu=e°√At i fa=—=;fu Question 2(a)Mr Adani invests in two risky securities with the following details:Security 1: r₁=0.16; ₁=0.30; Security 2:1₂=0.08; 0₂=0.25Where ₁ is the expected return of security 1 and ₁ is the standard deviation of returnsof security 1;12 is the expected return of security 2 and ₂ is the standard deviation of returns ofsecurity 2The correlation coefficient (P12) between the returns of the two securities is -0.5(i) Calculate the expected rate of return(r) and risk(o) for the following portfolios:1.40% security 1 and 60% security 2II.80% security 1 and 20% security 2(ii) Given a risk-free rate of 4%, describe how Mr. Adani can use a combination of a risk-free instrument and a risky portfolio with an expected return of 15% to achieve anexpected return of 26%.

We can determine the expected return and risk using the formula below: Expected Return = W1R1 +…

(i) Calculate the expected rate of return(r) and risk(o) for the following portfolios: 1.40% security 1 and 60% security 2 II.80% security 1 and 20% security 2 (ii) Given a risk-free rate of 4%, describe how Mr. Adani can use a combination of a risk- free instrument and a risky portfolio with an expected return of 15% to achieve an expected return of 26%.

(i) Calculate the expected rate of return(r) and risk(o) for the following portfolios: 1.40% security 1 and 60% security 2 II.80% security 1 and 20% security 2 (ii) Given a risk-free rate of 4%, describe how Mr. Adani can use a combination of a risk- free instrument and a risky portfolio with an expected return of 15% to achieve an expected return of 26%.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 16P

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