Individual expected returns

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ABCO is a conglomerate that hs ksh. $ billion in stcock. Its capital is invested in four subsidiaries : Entertainment(ENT), Consumer products(CON), Pharmaceuticals(PHA) and insurance(INS). The four subsidiaries are expected to perform differently, depending on the economic environment as follows:


Investment in ksh millions

poor economy

Average economy

Good economy

ENT

1,200

20%

-5%

-8%

CON

800

15%

10%

-20%

PHA

1,400

-10%

-5%

27%

INS

600

-10%

10%

10%

The three economic outcomes have an equal likelihood of occurring.

ABCO decides to borrow KSH 8 billion at 5% interest to triple its current investment in each of its four lines of business. Assume that this new investment has the same return outcomes as the old investment.

Required: 

Given the new investment,

1. Calculate the individual expected returns for each subsidiary 

2. Calculate the implicit portfolio weights for each subsidiary and an expected return and variance for the equity in the ABCO Conglomerate

3. To whom does this return belong to? Why?

Reference no: EM131115288

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