Mini-Case 1 Mr. Pawan Garg, a wealthy landlord has approached you for professional advice on investment. He has a surplus of Rs. 50 lakhs which he wishes to invest in share market in the name of his wife on their marriage anniversary falling due the next week. His wife is a senior employee in ONGD, a reputed pub- lic sector oil exploration company. In the course of your discus- sions, you find that he is a first timer to the secondary market and by nature much risk averse. He also tells you that he had wondered if investing in ONGD itself could be a good idea as it is quite profitable and is owned by our good old government. Besides, his wife would have reasons to know well in advance of any possible disasters for the company, being their employee for nearly two decades, also, she could justifiably be proud of owning such a stake in her company. While you agree with him on the choice of ONGD, you suggest that by way of risk reduction, it would be prudent to invest part of the money in BPDL, an equally reputed oil marketing com- pany, also state owned. At the end of the discussion, before committing the funds for the next one year, Mr. Garg desires to know from you specific answers to the following: a. What would be the likely return and risk if he invests equal amounts in each of the two stocks? (1) b. What would be the likely return from a portfolio of two stocks which could be the least risky? (2) c. Out of the above two alternatives, which would you rec- ommend and why? How many shares of each stock would then have to be bought? (2) You have the following historical data at your disposal which you intend to use for analyzing the pattern of co-movement be- tween the stocks: 1 2 3 4 5 6 7 8 9 10 Periods (years preceding the current one) ONGD (R.) Returns (in %) BPDL (R) 30 15 20 -6 -4 10 10 25-6 -2 154 -3 10 25 106 28 20 12