Question

You are an Investment Analyst at a fund management company, Waikato Investment Management Ltd. You are...

You are an Investment Analyst at a fund management company, Waikato Investment Management Ltd. You are asked to analyze the characteristics of two stocks, Wanaka Holdings Ltd. and Pukaki Consolidated Ltd. Below is a table showing some of the data you have gathered:

Stock

Beta

Standard Deviation

Covariance with Market

Wanaka

50%

0.015

Pukaki

1.5

30%

In addition, you also know that the expected return on the NZX50 (the market index) is 15% and the risk-free rate of interest presently is 5%. Assume that you can borrow and lend at the risk-free rate. Answer the following questions. Round the value of a non-integer number limited to two decimal places. You don't have to show the workings.

(a) Suppose the standard deviation of the market is 16%. What is the Beta of Wanaka? What is Pukaki’s covariance with the market?

(b) What are the correlations between Wanaka and the market? What are the correlations between Pukaki and the market?

(c) What would be the weight of Wanaka and Pukaki in a portfolio that has exactly the same expected rate of return as the market?

(d) What would be the weight of Wanaka and Pukaki in a portfolio that has a rate of return of 20%?

(e) What is the variance of this portfolio if the correlation between Wanaka and Pukaki is 0.5?

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