a. SBP's researcher has been given a task to estimate the return of a stock using two factor model. After careful analysis of the macro-economic data, she has concluded that two influential factors for her estimation are the interest rate and GNP growth rate. Whereby, interest rate is expected to be 3.1 percent and expected GNP growth is 3.6 percent. The particular stock has betas of 1.3 and 2.75 on the GNP growth rate and the interest rate respectively. Assume that the stock's expected return is 12 percent, find out the revised expected return on the stock when the actual growth in GNP is 3.2 percent and interest rate is 3.4 percent?(02 marks)

b. Suppose that you have determined that to estimate the expected returns of Stock 1,2, and 3, there are three important macro-economic factors namely: Inflation, economic growth, and interest rates. The s' are 2.8% for inflation, 3.5% for GDP growth and 4.8% for the interest rates. If the following relationship holds for these stocks:(05 Marks)

i.What are the expected returns for each of the three stocks next year?

ii.If they pay a dividend of Rs. 1 by the end of next year, and are currently traded for Rs. 150, what are the expected values of these stocks next year?

iii.If you construct a portfolio having these three stocks (1,2, & 3) with 20% invested in stock 1, 25% invested in stock 2, and remaining amount invested in stock 3. What is your portfolio's expected return?

c. Your international Portfolio management team leader is confident that for the investor's required return estimation of a two stock portfolio, the most appropriate model is Fama French 3 factor model. Your firm's analyst report shows that the expected returns on SMB, HML, and KSE-100 index are 3.25%, 4.5% and 7% respectively. The T-bill's currently giving 2% return. (05 Marks)

The relevant regression information about the two stocks ( , for both stock is 0, ignore terms) are given below as follows:

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i.Find the required rate of return on each of the two stocks.

ii.If a two stocks (A & B) equally weighted portfolio is constructed, what is the maximum return expected based on your analysis in part i, show all the calculations?

d. As the team lead, you are required to evaluate the performance of two portfolio given the following information for last 10 years:(06 marks)

Year

Portfolio A

Portfolio B

1

-1.50

-5.50

2

-1.45

-3.50

3

-1.50

-1.50

4

-1.25

3.00

5

0.00

4.50

6

4.25

5.00

7

6.50

6.50

8

8.50

7.50

9

12.75

12.50

10

14.75

13.50

i.Calculate the (a) the average annual return, (b) the standard deviation of returns, and (c) the semi-deviation of returns for both portfolios.

ii.If the average annual T-bill rate during last decade sample period was 1.5 percent, what would be the Sharpe ratio for both portfolios. Which portfolio seems to have outperformed the other?

iii.If the average risk free rate (mentioned above) is minimum acceptable return required, find out the Sortino ratio for each portfolio. Now, which portfolio have performed better?