Financial Management Probability Questions

Question Description

I need help with a Finance question. All explanations and answers will be used to help me learn.

a) Calculate the expected return and the standard deviation of return for both the company and the project.

b) Calculate the covariance and correlation between the returns of the company and the project.

c) Travelvan plc estimates the project will account for 10% of the company’s total market value after its acceptance. Calculate the expected return and the standard deviation of return for the combination of the company and the project.

d) An investment analyst has estimated the beta (?) of the project at 1.3. The risk free rate is 3.5% pa and the risk premium on shares is currently 10% pa. Explain whether the directors should focus on the project’s beta or its standard deviation (as calculated in part (a)) in their assessment of the project’s viability.

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