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