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Compute the correlation coefficient

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Question - The following information is the probability distribution of returns for Kotra Bhd. and Kossan Bhd. stocks:

Probability

0.15

0.50

0.35

Kotra Stock

45%

29%

12%

Kossan Stock

28%

21%

7%

Required -

a. Calculate the expected return and the standard deviation of Kotra stock.

b. Compute the correlation coefficient between Kotra Bhd. and Kossan Bhd. if the expected return for Kossan is 17.15% and standard deviation is 7.82%.

c. You have decided to invest RM120,000 in Kotra Bhd., RM40,000 in Kossan Bhd. and RM90,000 in Advanta Bhd. The expected return of Advanta Bhd. is 23.43% and the standard deviation is 10.26%. Covariance between Kotra Bhd. and Advanta Bhd. is 0.0098 and between Kossan and Advanta is 0.0072.

1. Calculate the expected return on this portfolio.

2. Calculate the standard deviation of this portfolio.

d. Briefly explain the appropriate performance measurement tool to gauge the ability of funds managers in managing the above portfolio.

Reference no: EM133156685

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