BWFF3193 SEMINAR IN FINANCE A191

CASE STUDY 2: LYXOR CHINAH VERSUS LYXOR MSINDIA: PORTFOLIO RISK AND
RETURN
After completion of the case, students should be able to:
1. Apply the concept of portfolio diversification
2. Apply the capital asset pricing model
3. Calculate the means returns, standard deviations, covariances, correlations, betas and
required returns to assess financial risk.
Assignment Questions:
1. Using the annual return data provided in Exhibit 1 of the case for Lyxor ChinaH and Lyxor
MSIndia, calculate their mean returns, standard deviations, covariance and correlation.
With these numbers, calculate the standard deviation and return for Susie’s entire portfolio.
2. After adding Lyxor USDJIA, what is the portfolio’s new standard deviation and return?
How does the new portfolio compare with the calculation in Question 1?
3. Based on your data analysis, should Susie diversify her portfolio or remain invested in
China and India only?
4. Calculate the betas of Lyxor ChinaH, Lyxor MSIndia and Lyxor USDJIA. To calculate the
covariance with the market proxy, use the Lyxor World return data shown in Exhibit 1 in
the case. Assuming a risk-free rate of 2.5 percent and a market risk premium of 5.5 percent,
what are the required returns for each of the three ETFs?
5. Calculate the existing portfolio’s beta and the new portfolio’s beta. Assuming a risk-free
rate of 2.5 percent and a market risk premium of 5.5 percent, what are the two portfolios’
required returns?
6. Assuming Susie plans to add a stock to the portfolio (new portfolio) with weights of 25%
each. Your task is to suggest that stock to her (assuming other things remain the same).
You can use finance.yahoo.com to collect the price information.