You currently hold an equally weighted portfolio of 20 stocks which has been doing quite well for the level of risk. The current value of the portfolio is ¢800,000. You have recently received ¢200,000 as part of your annual bonus. You have no immediate need for the cash and considering whether to invest the funds in KCTech shares or buy risk free government treasury bonds. The expected annual return on your current portfolio is 8% with a standard deviation of 8.2%, whilst the return on KCTech shares is 15% with a standard deviation of 12%. The correlation between the returns on KCTech and that of your original portfolio is 0.5. The yield on the Treasury bond is 5% per annum. 1. Calculate the expected return and standard deviation of your new portfolio if you decide to invest all the ¢200,000 in KCTech 2. Calculate the expected return and standard deviation of your new portfolio if you decide to invest all the ¢200,000 in Treasury
You currently hold an equally weighted portfolio of 20 stocks which has been doing quite well for the level of risk. The current value of the portfolio is ¢800,000. You have recently received ¢200,000 as part of your annual bonus. You have no immediate need for the cash and considering whether to invest the funds in KCTech shares or buy risk free government treasury bonds. The expected annual return on your current portfolio is 8% with a standard deviation of 8.2%, whilst the return on KCTech shares is 15% with a standard deviation of 12%. The correlation between the returns on
KCTech and that of your original portfolio is 0.5. The yield on the Treasury bond is 5% per annum.
1. Calculate the expected return and standard deviation of your new portfolio if you decide to invest all the ¢200,000 in KCTech
2. Calculate the expected return and standard deviation of your new portfolio if you decide to invest all the ¢200,000 in Treasury
3. An investment advisor is suggesting that you can improve the return on your original portfolio by limiting your stocks to only 10 without increasing your current level of risk. Discuss the likely impact of reducing the number of stocks in the portfolio on the risk of the portfolio and whether it is possible to reduce the number of stocks in the portfolio without significantly affecting the portfolio
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