Accounting and Financial Management

Questions: Consider shares in two companies, JAY and KAY, as follows: Expected Return E(R) Standard Deviation s Correlation Coefficient r Share JAY 12% 18% 0.3 Share KAY 24% 32% a) Calculate the covariance between Share JAY and KAY returns. b) What is the expected return and standard deviation of returns on a portfolio comprising 35% in Share JAY and 65% in Share KAY? c) If you wanted to create a portfolio consisting only of these two shares, how much would you need to invest (weights) in each share so that your portfolio return would be equal to 15.6%? Note: do not round. d) Using the weights calculated in part c), calculate the variance and standard deviation of your portfolio. Answers: a). Covariance = 2/3 ( Return abc Average abc ) * ( Return abc Average abc ) (Sample Size) - 1 = 2/3 x [(18-12) x (35-15)] (2)-1 = 2/3 x [(6)] x [(20)] (2) 1 = 2/3 x 240 5 = covariance is 48 b). Expected return and standard deviation = E(RA) = 2/3 0.12 + 1/3 0.18 = 0.5933 (5.93%) = E(RB) = 2/3 0.35 + 1/3 0.34 = 0.34 (3.4%) The expected rate of return for jay is 5.93% The expected rate of return for Kay is 3.4% Calculation of standard deviation SD(RA) = [2/3 (0.12-0.5933)2 + 1/3 (0.12-0.5933)2]0.5= 2.2535 (22.532%) SD(RB) = [2/3 (0.35-0.34)2 + 1/3 (0.35-0.34)2]0.5 = 0.335 (33.5%) c). In order to create a portfolio based on the above two shares a total 70 weights is required to be invested to arrive at 15.60% which will result in variance being 0.01789 and standard deviation will be 13.35% d). Jay Kay Expected return 12 24 Standard Return 18 32 Correlation coefficient -0.3 Weight 1 Expected Return variance Standard Deviation 100 12% 0.0324 18% 90 13.20% 0.02416 15.54% 80 14.40% 0.0193 13.89% 70 15.60% 0.01783 13.35% 60 16.80% 0.01975 14.05% 50 18% 0.02506 15.83% 40 19.20% 0.03375 18.37% 30 20.40% 0.04583 21.41% 20 21.60% 0.0613 24.76% 10 22.80% 0.08016 28.31% 0 24.00% 0.1024 32% Conclusion The preparations of this report require certain formula and it has adhered in terms of prescribed calculations as listed in the study. The reporting period of the report is in accordance with the financial statement, which will be prepared for a minimum period of at least one financial year. The report is consists of presentations and classification of items in the financial instruments which defines that any materiality changes in the above stated calculations. Recommendations This report illustrates the information, which approves for negotiation of convertible bonds for long term basis carrying the interest rate of 10% along with deterring the market price of each of the bonds issued. The current information about the basis of issue of financial instruments is prepared in accordance with the policies and procedures. Bibliography Parrino, R, Kidwell, D, Au Yong, H, Morkel-Kingsbury, N, Dempsey, M Murray, J 2011, Fundamentals of corporate finance, 1st edn, Wiley, Sydney. Parvi, R., 2014, September. Share price of companies listed on WIG20 and their fair value. InEDIS-Publishing Institution of the University of Zilina EIIC3 rd Electronic International Interdisciplinary Conference(pp. 169-177).