DEPARTMENT OF FINANCE AND ACCOUNTING

DFI501: FINANCIAL MANAGEMENT

RISK AND RETURN QUESTION
1. In the context of Risk and Return, explain the meaning of the statement
“No Pain No Gain”
2. “The unit of analysis for an individual investor in investment analysis is a portfolio”. Discuss

3. Mr. Chesoni has just inherited Sh. 2million from his grandfather. He is interested in
investing the money in a portfolio of two assets (AB or AC or BC). He would like to invest
equal amounts in each asset in the portfolio. You have been provided with following data in
respect of Asset A, B and C.

    Return Distribution ( % )
State of Nature ( Si) Probability ( Pi) A B C
1 0.25 12 6 5
2 0.15 6 6 6
3 0.3 6 12 6
4 0.1 4 12 12
5 0.2 2 14 12

Required
(i) Compute expected return for Asset A, B and C
(ii) Compute Variance for Asset A, B and C
(iii) Compute Correlation coefficient for portfolio AB, AC and BC
(iv)Using Correlation coefficient computed in (iv) above, compute the Variance of portfolio AB,
AC and BC
(v) Based on Variance , advise Mr. Chesoni ( on the two asset portfolio)
(vi)Compute variance for portfolio A , B and C (1/3 of the resources invested in each asset

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