= 10.35% Summary Investment ER ( ) (risk) σ X 10% 7.75% Y 13.4% 17.91% Portfolio XY 11.7% 10.35% An investor should aim at investing in an efficient Portfolio. An efficient Portfolio is the one with lowest level of risk for a given level of return or the one with highest level of return for a given level of risk. Correlation coefficient The correlation coefficient of returns of two securities is the standard measure of their relationships. The equation for correlation coefficient between the returns of securities X and Y = = is; corrRx,Ry = +0.17% Exercise: Gold Coast Securities is planning to invest a client’s investment funds of GH¢10,000 as follows: GH¢5,500 in shares of Tullow Oil Ghana (X) and GH¢4,500 in shares of SIC Insurance (Y). But the expected returns on this plan are predicated on the forecasted likely state of the Ghanaian economy as presented below. Likely state of the Probability of Return on Tullow Return on SIC economic occurrence (Pi) GH shares (Rx) shares (Ry) Boom 0.5 30% 14%
= 10.35% Summary Investment ER ( ) σ (risk) X 10% 7.75% Y 13.4% 17.91% Portfolio XY 11.7% 10.35% An investor should aim at investing in an efficient Portfolio. An efficient Portfolio is the one with lowest level of risk for a given level of return or the one with highest level of return for a given level of risk. Correlation coefficient The correlation coefficient of returns of two securities is the standard measure of their relationships. The equation for correlation coefficient between the returns of securities X and Y is; corrRx,Ry = = = +0.17% Exercise: Gold Coast Securities is planning to invest a client’s investment funds of GH¢10,000 as follows: GH¢5,500 in shares of Tullow Oil Ghana (X) and GH¢4,500 in shares of SIC Insurance (Y). But the expected returns on this plan are predicated on the forecasted likely state of the Ghanaian economy as presented below. Likely state of the economic Probability of occurrence (Pi) Return on Tullow GH shares (Rx) Return on SIC shares (Ry) Boom 0.5 30% 14%
pbbf306-chapter-three.docx