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QUESTION 2 (25 MARKS) Eliya has a RM800,000 of diversified portfolio. She inherits XYZ companys...

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Finance

QUESTION 2 (25 MARKS)

Eliya has a RM800,000 of diversified portfolio. She inherits XYZ companys common stock worth RM200,000. The following forecast information as follows:

Risk and Return Characteristics

Expected Monthly

Returns

Standard Deviation of

Monthly returns

Original Portfolio

0.7%

2.5%

XYZ

Company

1.2%

3%

The correlation coefficient of XYZ Company stocks returns with Eliyas Portfolio is 0.5.

A) The inheritance changes Eliyas overall portfolio and assuming Husna keeps the XYZ stock. Calculate.

  1. Expected return of her new portfolio.
  2. Covariance of XYZ stock returns with the original portfolio.
  3. Standard deviation of her new portfolio.

B) If Eliya sells the XYZ stock, and she will proceed to invest in T-Bills yielding 0.42% monthly. Calculate her new portfolio

  1. Expected return.
  2. Covariance of T Bills returns with the original portfolio.
  3. Standard deviation of her new portfolio.
  4. Determine whether the systematic risk of her new portfolio will be higher or lower than that of her original portfolio?

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