Week 5 Workshops

Workshop 1:
Learning activity 5.2

a) You are considering investing in two quoted shares, C plc and K plc, which have expected returns
and standard deviations as follows:

C K
Expected return 25% 20%
Standard deviation 15% 10%

The correlation coefficient between the returns of the shares is estimated as +0.24.

Required:
Calculate the expected return and standard deviation of possible portfolios consisting of:
a) 25% C;
b) 50% in each company;
c) 75% C.

b) Phantom plc wishes to buy £1 million of shares in each of two companies from a choice of three
companies that it might wish to acquire at some future date. The companies are in different
industries. Historic five year data on the risk and returns of the three companies are shown below:

Average annual returns Standard deviation of returns

Mangeit Foods 11% 17%
Altalk Communications 20% 29%
Legi Printers 14% 21%

Correlation coefficients
between returns:
Mangeit and Altalk 0.00
Altalk and Legi 0.40
Mangeit and Legi 0.62

An advisor to Phantom plc has suggested that the decision about which shares to buy should be based
upon selecting the most efficient portfolio of two shares.

Required:
Estimate which of the possible portfolios is the most efficient and discuss whether or not Phantom
plc’s strategy should be to purchase the most efficient portfolio of two shares.