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Revision_Tutorial_2009 - BUS3026W Finance II 2009 Revision...

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BUS3026W Finance II 2009 – Revision Tutorial Due: Not for hand-in ___________________________________________________________________ Question 1 Abigail Grace has a R900 000 fully diversified portfolio. She subsequently inherits shares in ABC Company Ltd. worth R100 000. Her financial advisor provided her with the following information: Risk return characteristics Expected Return Standard Deviation Original Portfolio 15% 36% ABC Company 9% 21% The correlation coefficient of ABC share returns with the original portfolio returns is 0.40. The T-Bill rate in the market is 8%. a) The inheritance changes Grace’s overall portfolio and she is deciding whether to keep the ABC shares. Assuming Grace keeps the ABC shares, calculate the: i. Expected return of her new portfolio which includes the ABC shares. ii. Covariance of ABC share returns with the original portfolio returns. iii. Standard deviation of her new portfolio which includes the ABC shares. b) Would you recommend that Grace keep the ABC shares? Justify your response.
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