fundementals of finance

Fundamentals of finance 1

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Fundamentals of finance

1 . The return of a portfolio is equal to the weighted average of return of individual securities in the portfolio with weights being equal to proportion of investment in those securities

ER (q WRx (1 - w ) Ry

Where W proportion of investment in security x

w The remaining investment in security y

ER (p Expected return or portfolio

Rx Expected return of security x

RY expected return of security

Since the investor

has 2 ,000 ,000 and the projects are invisible where the entire amount has to be invested then he has a choice of investing in project A B , B C or B D

Using portfolio A B

ER (p WA RA WBRB

ER (P (0 .6 X 22 (0 .4 x 28 13 .2 11 .2

ER (p 24 .4

Fundamentals of finance 2

Using Portfolio B C

ER (q WB RB WC RC (0 .4 x 28 (0 .6 x 30

11 .2 18 29 .2

Using Portfolio B D

ER (p WB RB WO RO (0 .4 X 28 (0 .6 x 34

11 .2 20 .4 31 .6

The risk of portfolio need to be considered before determining the optimum portfolio to invest in ?2

?2A WA2 ?2B WB2 2 (WA WB ?A ?B ) cor A , B

Where cor A .B Correlation coefficient between A B ?2

portfolio variance ?A standard deviation of security A ?B standard deviation of security...