1 / 2 83% + FINN 200 - Assessment 3 Question 1: Congratulations! You have been placed on dean's honor list for accounting and finance major. In order to reward you for your hard work, Dean of Suleman Dawood School of Business, has offered you the following two stocks: . Stock Suleman with Ry=0.10 and o =0.0025 Stock Dawood with R2=0.16 and 3 =0.0064 . (a) Which stock would you choose if you want to maximize your expected return? Give justification for your choice. [4 Marks (b) Which stock would you choose if you want to minimize the return? Keep in mind you cannot form a portfolio. Give justification for your choice. [4 Marks] (c) Through calculations, you have come to realize that that correlation between Suleman Stock and Dawood stock is +1. What is the optimal combination of Suleman stock and Dawood stock you would hold, if you want to minimize the risk? 14 Marks) (d) Now suppose that correlation was -1. What fraction of your net worth should be held in Suleman Stock and Dawood stock, if you want to have zero risk portfolio? 14 Marks) (e) What is the expected return on the portfolio you have formed in part (d)? How does it compare with the riskless return of ten percent being offered by State Bank of Pakistan on it's T bills. Would you rather invest in State Bank of Pakistan T bills? 14 Marks) Activate Pakistan Steel Mills is currently over levered with a 1 / 2 83% + FINN 200 - Assessment 3 Question 1: Congratulations! You have been placed on dean's honor list for accounting and finance major. In order to reward you for your hard work, Dean of Suleman Dawood School of Business, has offered you the following two stocks: . Stock Suleman with Ry=0.10 and o =0.0025 Stock Dawood with R2=0.16 and 3 =0.0064 . (a) Which stock would you choose if you want to maximize your expected return? Give justification for your choice. [4 Marks (b) Which stock would you choose if you want to minimize the return? Keep in mind you cannot form a portfolio. Give justification for your choice. [4 Marks] (c) Through calculations, you have come to realize that that correlation between Suleman Stock and Dawood stock is +1. What is the optimal combination of Suleman stock and Dawood stock you would hold, if you want to minimize the risk? 14 Marks) (d) Now suppose that correlation was -1. What fraction of your net worth should be held in Suleman Stock and Dawood stock, if you want to have zero risk portfolio? 14 Marks) (e) What is the expected return on the portfolio you have formed in part (d)? How does it compare with the riskless return of ten percent being offered by State Bank of Pakistan on it's T bills. Would you rather invest in State Bank of Pakistan T bills? 14 Marks) Activate Pakistan Steel Mills is currently over levered with a
