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Bond Valuation

  0 Downloads   |   2 Pages 364 Words   |   Published Date: 18/05/2017


Consider shares in two companies, JAY and KAY, as follows:


Expected Return


Standard Deviation


Correlation Coefficient


Share JAY



– 0.3

Share KAY



a) Calculate the covariance between Share JAY and KAY returns.

b) What is the expected return and standard deviation of returns on a portfolio comprising 35% in Share JAY and 65% in Share KAY?

c) If you wanted to create a portfolio consisting only of these two shares, how much would you need to invest (weights) in each share so that your portfolio return would be equal to 15.6%? Note: do not round.

d) Using the weights calculated in part c); calculate the variance and standard deviation of your portfolio. 




Covariance between Share JAY and KAY returns: - To calculate the Covariance between Share JAY and KAY returns following formula is used:-

= Standard Deviation of JAY * Standard Deviation of KAY *(Correlation Coefficient)

= 18 *32 *(0.3)

= 172.6

Hence, Covariance between Share JAY and KAY returns is 172.6


(i) Expected Return: - Expected return means that the return the investor can expect in the future. It is not the accurate return but only expected return. 

Expected Return = Weight of JAY *(Expected Return) + Weight of KAY * (Expected Return)

Expected Return = 0.35*(12) + 0.65 * (24)

Expected Return = 19.8%

Hence, the Expected Return is 19.8%

(ii)  Standard Deviation

√(WA2σa)+ (WB2σB)+2 (σA*WA*Σb *WB)* Correlation Coefficient

√(0.35*0.35*18*18)+(0.65*0.65*32*32)+2(18* 0.35*32*0.65*-0.3)

√39.69+32.64 -78.624


σ = 19.84


If a portfolio is to create consisting only of these two shares, and to make the portfolio return equal to 15.6% then  the investment is to be made of :-

Let assume the weight of JAY is W, then the Weight of KAY WILL BE 1-W

Desired Portfolio Return = 15.6%

15.6% = W*12%+ (1-W)* 24%

0.156 = 0.12W +0.24- 0.14 W

0.156 -0.24 =-0.12W

0.084 = 0.12W

0.084 / 0.12 = W

0.7 =W

Expected weight which is earned is 15.6%

Then weight of JAY (W) will be 70%

Weight of KAY (1-W) will be 30%.


(i) Basis on the above calculation revised Standard Deviation is:-


New Weight

Standard Deviation







σ   = √ (0.70 * 0.70 *18 *18) + (0.30 * 0.30 * 32 * 32) + 2 (0.70 *18*0.30 *32 *- 0.3)

σ = √158.76 + 92.16 -36.288

σ= √214.632

σ = 14.65  


(ii) Variance is the square of standard deviation

Variance = (σ) 2

= (14.65) 2

Variance = 214.62. provides guaranteed satisfaction with a commitment to complete the work within time. Combined with our meticulous work ethics and extensive domain experience, is the ideal partner for all your homework/assignment needs. We pledge to provide 24*7 support to dissolve all your academic doubts. We are composed of 3000+ esteemed experts who have been empanelled after extensive research and quality check. provides undivided attention to each assignment order with a methodical approach to solution. Our network span is not restricted to US, UK and Australia rather extends to countries like Singapore, Canada and UAE. Our assignment help services include thesis help, case study help, homework help, coursework help, MBA help and Programming help. Get your work done at the best price in industry.

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