Question 01:An investor places 30% of his funds in Security A and the balance in Security B. The expected returns on A a...

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An investor places 30% of his funds in Security A

April 14, 2018

Question 01:

An investor places 30% of his funds in Security A and the balance in Security B. The expected returns on A and B are 12% and 18%, respectively. The standard deviations of returns on A and B are 20% and 15% respectively.

Calculate the expected return on the portfolio.

Calculate the Variance of returns on the portfolio assuming that the

correlation between the returns on the two securities is:

1.00

0.7

0

- 0.7

Comment on your results in Part.b above.

Marks: (1+2+1)

Question 02:

An investor holds a portfolio that comprises of 20% stock A, 30% stock B and 50% stock C. The standard deviations of returns on Stocks A, B and C are 22%, 15% and 10%, respectively, and the correlation between returns on each pair of securities is 0.6. Prepare a variance-covariance matrix for these three securities and use the matrix to calculate the variance and standard deviation of returns for the portfolio.

Marks: (3)

Question 03:

The risk free rate of return is currently 8% and the market risk premium is estimated to be 6%. The expected returns and betas of four shares are as follows:

Share Expected Return (%) Beta

A 13.0 0.7

B 17.6 1.6

C 14.0 1.1

Identify that which shares are undervalued, overvalued or correctly valued based on the CAPM.










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