Returns depend on the future state of the economy

Reference no: EM131126901

The management of Gawain plc is evaluating two projects whose returns depend on the future state of the economy as shown below:

The project (or projects) accepted would double the size of Gawain.

Required

(a) Explain how a portfolio should be constructed to produce an expected return of 20 per cent.

(b) Calculate the correlation between projects A and B, and assess the degree of risk of the portfolio in (a).

(c) Gawain's existing activities have a standard deviation of 10 per cent. How does the addition of the portfolio analysed in (a) and (b) affect risk?

Reference no: EM131126901

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