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Calculate the expected return of the portfolio

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Reference no: EM132580075

Frane Ltd has available two investment opportunities with the following risk return characteristics

A B

Expected return 13% 20%

Risk 4% 8%

Frane Ltd plans to invest 65% of its available funds in Security A, and 35% in B. The directors believe that the correlation coefficient between the returns of the securities is +0.2.

(i) Calculate the expected return of the portfolio and the risk of the portfolio.

(ii) Suppose the correlation coefficient between A and B was -1.0. How should Frane Ltd invest its funds in order to obtain a zero risk portfolio?

(iii) According to CAPM, "The only risk that matters to an investor is non-diversifiable risk." Do you agree with the comment? Discuss.

2. "Both trade-off theory and pecking order theory explain why companies may differ in their levels of gearing." Discuss this statement.

Reference no: EM132580075

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