Corporate Finance | Strategy & Corporate Finance

Running head: CORPORATE FINANCE
Corporate Finance
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CORPORATE FINANCE
Table of Contents
Part 1:...............................................................................................................................................2
Question 1: Explaining the risk of shares can be calculated by the standard deviation..............2
Question 2: Explaining how adding new shares to a portfolio can affect the risk and return of
that portfolio................................................................................................................................3
Question 3: Explaining what would happen if one of the two assets was a risk-free asset.........4
Question 4: Explaining the distinction between Systematic and Unsystematic Risk..................4
Part 2:...............................................................................................................................................5
i) Calculating the expected return and the standard deviation of Portfolio l:..............................5
ii) Calculating the expected return and the standard deviation of Portfolio 2:............................6
iii) Explaining the differences in the risks and the returns between Portfolio 1 and 2:...............6
iv) Calculating the expected return and the standard deviation of Portfolio 3:...........................7
v) Calculating the expected return and the standard deviation of Portfolio 4:............................7
vi) Calculating the expected return and the standard deviation of Portfolio 5:...........................8
vii) Explaining the differences in the risks and the returns between Portfolio 3, 4 and 5:..........9
References:....................................................................................................................................10

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CORPORATE FINANCE
Part 1:
Question 1: Explaining the risk of shares can be calculated by the standard deviation
The standard deviation formula is mainly used for detecting the level of volatility that is
present within the overall share price valuation. The capital market continuously affects the
overall prices of the stock, where the price fluctuations is taken into consideration, while
calculating the returns. Thus, it is detected that with the implementation of the standard deviation
method, investors can detect the level of risk that is associated with the alternation in the
volatility. The stock prices are considered as the lognormal distribution, where it is detected that
Y = ln(X) is normally distributed. Hence, the stock return on daily basis is mainly compared with
the average returns or mean to determine the level of risk or volatility that is present within the
price fluctuation of the stock. Therefore, the mean of the stock is compared with the stock returns
on daily basis to determine the difference, whereas higher alteration between both the data
instigate about the high volatility present with in the stock. Thus, using the standard deviation,
actual risk associated with the volatility of the stock is detected, which would help them make
appropriate investment decisions1.
1 Briere, Marie, Kim Oosterlinck, and Ariane Szafarz. "Virtual currency, tangible return: Portfolio diversification
with bitcoin." Journal of Asset Management 16.6 (2015): 365-373.

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CORPORATE FINANCE
Question 2: Explaining how adding new shares to a portfolio can affect the risk and return
of that portfolio
The above figure provides information regarding the overall formula, which can be used
for determining the appropriate risk level of the portfolio returns. Therefore, risk of the portfolio
can be determined by using the standard deviation formula, which uses the overall return of the
portfolio. Consequently, standard deviation in context with the investment returns is considered a
quantitative statistical measure of variation that affects the average of the returns. The addition of
stock in the portfolio can influence the risk and return components of the investment, as
correlation coefficient has a direct impact on determining the appropriate investment option. The
addition of new shares would directly have impact on the risk contribution of the portfolio,
where the correlation function between the returns of the stock have impact on the risk of the
portfolio2. Thus, highly correlated stock would mainly reduce the diversification and increase
risk of the stock, while low correlated stocks increases the diversification of the portfolio. Thus,
an increment in the overall diversification win the portfolio would directly reduce the total risk
associated with the investment.
2 Guesmi, K., Saadi, S., Abid, I., & Ftiti, Z. (2019). Portfolio diversification with virtual currency: Evidence from
bitcoin. International Review of Financial Analysis, 63, 431-437.