a.

An investor is considering five securities in the portfolio with following expected return,
standard deviation, and beta :

Assets Return % Standard Deviation % Beta

Apple 30.0 25.00 1.10
Orange 9.00 12.00 0.40
Mango 15.00 23.00 1.30
Pineapple 22.00 13.00 0.20
Guava 35.00 21.00 1.45
Banana 25.00 20.00 1.20
The market, with index used as a proxy, is expected to have a standard deviation of 13%. The
investor has decided to put 10%, 20%, 15%, 15%, 25% and 15% respectively in Apple, Orange,
Mango, Pineapple, Guava, and Banana respectively.

Required
i. Total risk of an asset can be decomposed into its market component and non market

  
2 2 2
component is by the model m i
i
calculate the market component of the
portfolio and each asset [7 marks]
ii. Using the relationship Residual variance = Total variance – Systematic risk, calculate
the non-market component of each asset [6 marks]