Reference no: EM132995983

1     Lyxor ChinaH Versus Lyxor MSIndia: Portfolio Risk and Return (China / India): 1.1          

Brief Description of the Case

The case is about Susie's financial analysis towards her existing personal investment portfolio and the decision as to whether she should diversify or remain her portfolio.

Susie's existing portfolio included two exchange traded funds (ETF) invested in the equity markets of China and India, namely Lyxor ChinaH (60%) and Lyxor MSIndia (40%).

The enrolment in a corporate finance class had enabled Susi to improve her investment knowledge in terms of risk and return.

1.2 Key Issues to be Addressed

(a)  Susie decided to select an ETF that tracked the US equity market such as Lyxor USDJIA as well as Lyxor World that invested in the public equity markets of developed countries.

Based on the annual return data of Lyxor ChinaH (60%) and Lyxor MSIndia (40%), Susie will have to calculate their mean returns and standard deviations. With the calculated figures, then calculate the standard deviation and return for her entire portfolio. The same computation could be used for an alternative portfolio comprising Lyxor ChinaH (40%), Lyxor MSIndia (30%) and Lyxon USDJIA (30%).

(b) Susie intended to compute the betas of Lyxor ChinaH, Lyxor MSIndia, Lyxon USDJIA using their covariance, assuming a risk-free rate of 2.5% and a market risk premium of 5.5% and to derive the two portfolios' required returns.

Questions:

1) Using the annual return data of the case for Lyxon ChinaH and Lyxor MSIndia, calculate their mean returns, standard deviations, covariance and correlation. With these numbers, calculate standard deviation and return for Susie's entire portfolio.

2) After adding Luxon USDJIA, what is the portfolio's new standard deviation and return? How does the new portfolio compare with the calculation in Question 1? Should Susie diversify he portfolio or remain invested in China and India only?

3) Calculate the betas of Lyxon ChinaH, Lyxon MSIndia and Lyxon USDJIA. To calculate the covariance with the market proxy, use the Lyxon World return data shown in above Table in the case. Assuming a risk-free rate of 2.5% and a market risk premium of 5.5%, what are the required returns for each of the three ETFs?

4) Calculate the existing portfolio's beta and the new portfolio's beta. Assuming a risk-free rate of 2.5% and a market risk premium of 5.5%, what are the two portfolio's required returns?