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MGT201 - Financial Management Assignment No. 1 Solution Fall 2018 Due Date: January 25, 2018
Financial Management MGT201
Assignment #01 Marks= 25
Risk and return Analysis
Investment decisions are not taken in insolation; investors have to consider market
dynamics and firm level factors to choose among various available securities. Among
different factors affecting the investment decisions; risk and return are the significant
one. Considering only one of these two factors will not lead to a rational decision;
investors have to consider both for an optimal portfolio. Along with these factors; risk
appetite of an investor cannot be separated from investment decision. The decision of risk
taker investor is definitely different from a risk-averse investor.
Suppose you are a new investor in the market and you have two options for investing
your money. On the basis of risk return analysis and your risk appetite you are required to
select the one that suits you the most.
Following information is available for the two stocks:
Stock A Stock B
Returns Probability Returns Probability
29% 25% 30% 35%
28% 25% 29% 45%
30% 50% 28% 20%
You are required to calculate:
Return (8 marks)
1. Expected return on stock A
2. Expected return on stock B
Risk (12 marks)
3. Coefficient of variation for Stock A
4. Coefficient of variation for Stock B
On the basis of calculation of return and risk of both stocks; select the one according to
your risk appetite (Note: First declare yourself either as risk-averse investor or risk
taker investor). 1 Mark
Now construct a portfolio of these two securities with proportion of 40% of your total
investment in Stock A and 60% in Stock B; keeping all other information same (about
risk and return) calculate risk of portfolio if covariance between two stock is -0.45.
Compare the risk of your selected stock and the portfolio; do you think portfolio have
diversified the risk? 4 Marks
NOTE: Formula and calculations are mandatory in each part. Before taking
investment decision you are required to declare yourself either as Risk taker or risk
Averse investor otherwise your decision will be not considered.
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