GROUP ASSIGNMENT COVER SHEET

STUDENT DETAILS

Student name: Trần Ngọc Thảo Vy Student ID number: 22002343

Student name: Ngô Hoàng Anh Student ID number: WSU21000154

Student name: Trần Gia Lập Student ID number: 21001251

Student name: Đỗ Anh Khôi Student ID number: WSU21000207

Student name: Trần Khải Minh Student ID number: 21001204

UNIT AND TUTORIAL DETAILS

Unit name: Corporate Finance Unit number: CF-T223WSB-2

Tutorial/Lecture: Lecture Class day and time: Wed, 8AM - 11.15AM
Lecturer or Tutor name: Ms. Thoa Tu
ASSIGNMENT DETAILS

Title: Group Exercise

Length: 4 Pages Due date: July 5th, 2023 Date submitted: July 5th, 2023

DECLARATION
I hold a copy of this assignment if the original is lost or damaged.
I hereby certify that no part of this assignment or product has been copied from any other student’s work or
from any other source except where due acknowledgment is made in the assignment.
I hereby certify that no part of this assignment or product has been submitted by me in another
(previous or current) assessment, except where appropriately referenced, and with prior permission
from the Lecturer / Tutor / Unit Coordinator for this unit.
No part of the assignment/product has been written/ produced for me by any other person except
where collaboration has been authorized by the Lecturer / Tutor /Unit Coordinator concerned.
I am aware that this work may be reproduced and submitted to plagiarism detection software programs for
the purpose of detecting possible plagiarism (which may retain a copy on its database for future
plagiarism checking).

Student’s signature: Vy
Student’s signature: Anh
Student’s signature: Lap
Student’s signature: Khoi
Student’s signature: Minh

Note: An examiner or lecturer /tutor has the right to not mark this assignment if the above declaration has not
been signed.
 Exercise 4
Problem 1:

weight of SM Entertainment = 60% = 0.6

weight of YG Entertainment = 40% = 0.4

SD of SM Entertainment = 10% = 0.1

SD of YG Entertainment = 20% = 0.2

To calculate the variance and standard deviation of portfolio returns, we use this formula:

Var = (weight of SM Entertainment x SD of SM Entertainment)2 + (weight of YG Entertainment x

SD of YG Entertainment)2 + 2 x weight of SM Entertainment x weight of YG Entertainment x
correlation x SD of SM Entertainment x SD of YG Entertainment

SD = 𝑉𝑎𝑟

a. correlation is 1.0
Var = (0.6 x 0.1)2 + (0.4 x 0.2)2 + 2 x 0.6 x 0.4 x 1.0 x 0.1 x 0.2 = 0.0196

SD = 0. 0196 = 0.14 = 14%

b. correlation is 0.5
Var = (0.6 x 0.1)2 + (0.4 x 0.2)2 + 2 x 0.6 x 0.4 x 0.5 x 0.1 x 0.2 = 0.0148

SD = 0. 0148 ≈ 0.122 = 12.2%

c. correlation is 0

2 2 2 2
Var = 0. 6 × 0. 1 + 0. 4 × 0. 2 + 2 × 0. 6 × 0. 4 × 0. 1 × 0. 2 × 0 = 0. 01

SD = 0. 01 = 0. 1 = 10%

d. correlation is -1

2 2 2 2
𝑉𝑎𝑟 = 0. 6 × 0. 1 + 0. 4 × 0. 2 + 2 × 0. 6 × 0. 4 × 0. 1 × 0. 2 × (− 1) = 0. 0004

SD = 0. 0004 = 0. 02 = 2%
Comments on the Problem 1 results:

● When the correlation between the returns is 1.0, the SD of the portfolio returns is 14%

=> the portfolio has a moderate level of risk.

● When the correlation between the returns is 0.5, the SD of the portfolio returns is 12.2%

=> the portfolio has a lower level of risk compared to the case with a correlation of 1.0.

● When the correlation between the returns is 0, the SD of the portfolio returns is 10%

=> the portfolio has the lowest level of risk.

● When the correlation between the returns is -1, the SD of the portfolio returns is 2%

=> the portfolio has a high level of risk, as the negative correlation does not provide
diversification benefits.

Problem 2:
The expected returns for each of the stocks:

E(RVCB) = Σ pi x E(R)i = 0.15 x 0.2 + 0.35 x 0.15 + 0.35 x 0.1 + 0.15 x 0.05 = 12.5%

E(RVIC) = 0.15 x 0.2 + 0.35 x 0.1 + 0.35 x 0.15 + 0.15 x 0.05 = 12.5%

E(RFPT) = 0.15 x 0.05 + 0.35 x 0.1 + 0.35 x 0.15 + 0.15 x 0.2 = 12.5%

a.
To calculate the covariance between each pair of stock, we can use the formula:

Cov(A,B) = Σ pi x [(E(RA)i - E(RA)] x [(E(RB)i - E(RB)]

Cov (VCB,VIC) = 0.15 x (0.2 - 0.125) x (0.2 - 0.125) + 0.35 x (0.15 - 0.125) x (0.1 - 0.125) + 0.35 x
(0.1 - 0.125) x (0.15 - 0.125) + 0.15 x (0.05 - 0.125) x (0.05 - 0.125) = 0.00125

Cov (VCB, FPT) = 0.15 x (0.2 - 0.125) x (0.05 - 0.125) + 0.35 x (0.15 - 0.125) x (0.1 - 0.125) + 0.35
x (0.1 - 0.125) x (0.15 - 0.125) + 0.15 x (0.05 - 0.125) x (0.2 - 0.125) = -0.002125
Cov (VIC, FPT) = 0.15 x (0.2 - 0.125) x (0.05 - 0.125) + 0.35 x (0.1 - 0.125) x (0.1 - 0.125) + 0.35 x
(0.15 - 0.125) x (0.15 - 0.125) + 0.15 x (0.05 - 0.125) x (0.2 - 0.125) = -0.00125

b.
E(P) = 0.5 x E(VCB) + 0.5 x E(VIC) = 0.5 x 0.125 + 0.5 x 0.125 = 12.5%
2
The variance of the portfolio: Var = Σ𝑝𝑖[𝐸(𝑅)𝑖 − 𝐸(𝑅)]

Var(VCB) = 0.15 x (0.20 - 0.125)^2 + 0.35 x (0.15 - 0.125)^2 + 0.35 x (0.10 - 0.125)^2 + 0.15 x
(0.05 - 0.125)^2 = 0.002125

Var (VIC) = 0.15 x (0.20 - 0.125)^2 + 0.35 x (0.1 - 0.125)^2 + 0.35 x (0.15 - 0.125)^2 + 0.15 x (0.05
- 0.125)^2 = 0.002125

2 2 2 2
𝑉𝑎𝑟 (𝑃) = 𝑊1 × σ1 + 𝑊2 × σ2 + 2 × 𝑊1 × σ1 × 𝑊1 × σ1 × 𝑝

Var(P) = (0.5)^2Var(VCB) + (0.5)^2Var(VIC) + 2 x (0.5)(0.5) x Cov(VCB, VIC) = (0.5)^2 x

0.002125 + (0.5)^2 x 0.002125 + 2 x (0.5)(0.5) x 0.00125 = 0.0016875

SD(P) = 𝑉𝑎𝑟(𝑃) = 0. 0016875 = 0. 041

c.
State: Return on Portfolio
Normal 50%x20%+50%x5%=12.5%
Boom 50%x15%+50%x10%=12.5%
Bust 50%x10%+50%x15%=12.5%
Recession 50%x20%+50%x5%=12.5%
The expected return of portfolio:
E(P) = 0.15 x 0.125 + 0.35 x 0.125 + 0.35 x 0.125 + 0.15 x 0125= 0.125 or 12.5%
Var(P)= 0.15 x (0.125 - 0.125)^2 + 0.35 x (0.125 - 0.125)^2 + 0.35 x (0.125 - 0.125)^2 + 0.15 x
(0.125 - 0.125)^2=0

SD(P) = 𝑉𝑎𝑟(𝑃) = 0 = 0
d.
The expected return of portfolio:
E(P) = 0.3 x E(VCB) + 0.4 x E(VIC) + 0.3 x E(FPT) = 0.3 x 0.125 + 0.4 x 0.125 + 0.3 x 0.125
=12.5%

State: Return on Portfolio

Normal 30% x 20% + 40% x 20% + 5% x 30%=15.5%
Boom 30% x 15% +40% x 10% + 30% x 10%=11.5%
Bust 30% x10% +40% x 15% +30% x 15%=13.5%
Recession 30%x 5% + 40% x 5% + 30%x 20%=9.5%

Var(P)= 0.15 x (0.155-0.125)^2 + 0.35 x (0.115-0.125)^2 + 0.35 x (0.135-0.125)^2 + 0.15 x

(0.095-0.125)^2= 0.00034

SD(P)= 𝑉𝑎𝑟(𝑃) = 0. 00034 = 0. 018 or 1.8%