Expected return and the standard deviation of such portfolio

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Reference no: EM131509431

The shares of a company AVV are currently traded at £50. One risk- free asset is also available on the market. The borrowing rate and lending rate are the same and equal to 5% per year. It is expected that the price of the AVV shares in the next year will be as follows:

£60 with probability 0.05 £56 with probability 0.1 £54 with probability 0.25 £49 with probability 0.1 £47 with probability 0.05 Calculate:

£58 with probability 0.05 £55 with probability 0.15

£51 with probability 0.15 £48 with probability 0.1

(i) The expected return on the AVV shares.

(ii) The standard deviation of this return.

(iii) An individual invests 20% of his/her money in a risk-free asset by lending money, and the remaining 80% in the shares of AVV. By using the mean-variance model, calculate the expected return and the standard deviation of such portfolio.

Reference no: EM131509431

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