Question

# Consider the following information about the shares of a large advertising company, WWPP listed on both...

Consider the following information about the shares of a large advertising company, WWPP listed on both the New York and London Stock Exchanges and a small unlisted public relations company, FAME.

Share Expected return (yearly) Risk (standard deviation)
WWPP 10% 14%
FAME 16% 28%
The correlation coefficient between the shares of WWPP and FAME is 0.7.

Estimate the risk and expected return of a portfolio comprising 40% of shares in WWPP and 60% of shares in FAME. Show your workings.

a). Expected Return = [Wwwpp x E(R)wwpp] + [Wfame x E(R)fame]

= [0.40 x 10%] + [0.60 x 16%] = 4% + 9.6% = 13.6%

b). S.D. = [(Wwwpp2 x wwpp2) + (Wfame2 x fame2) +

{2 x Wwwpp x Wfame x wwpp x fame x (wwpp,fame)}]1/2

= [(0.42 x 14%2) + (0.62 x 28%2) + (2 x 0.4 x 0.6 x 14% x 28% x 0.7)]1/2

= [31.36%2 + 282.24%2 + 131.71%2]1/2 = [445.31%2]1/2 = 21.10%

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