Mr. Ahmad Aziz had invested AFN 8 million each in Habibi Enterprise and Kasoor Ltd and AFN

4 million in MTN, a week before his death. His will suggest that this portfolio of investment will

only belong to his wife, Shireen. As the partition among the family members had to wait for one

year as per the conditions of the will, the portfolio of investment in shares remain the same as it

is. The will had stipulated that the job of administering the estate for the benefit of the beneficiaries

and partitioning it in due course was to be done by the reputed firm of Chartered Accountants,

Sahibi Financial Services. Meanwhile Shireen was very eager to know certain details of the

investment and had asked the senior partner of Sahibi Financial Services to brief her in this regard.

For this purpose the senior partner has asked you to prepare a detailed note to him with calculations

using CAPM, to answer the following possible uncertainities.

a. What is the expected return and risk (standard deviation) of the portfolio? (6 marks)

b. What is the scope for appreciation in market price of the three stocks-are they overvalued

or undervalued? (6 marks)

You find that out the three stocks, your firm has already been tracking two viz. Habibi Enterprise

(A) and Kasoor Ltd (B)-their betas being 1.7 and 0.8 respectively. Further, you have obtained the

following historical data on the returns of MTN (C):

Period Market Return (%) MTN Return on (%)

1 10% 14%

2 5% 8%

3 -2% -6%

4 -1% 4%

5 5% 10%

6 8% 11%

7 10% 15%

On the basis of the expected return of the given three stocks, you are able to obtain the following

forecast from a well-known firm of portfolio managers.

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State of the Probability Returns (in percentage)

Economy Treasury Habibi Kasoor MTN Market

Bills Enterprise Ltd

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Recession 0.3 7 5 15 (10) (2)

Normal 0.4 7 18 8 16 17

Boom 0.3 7 30 12 24 26

Required: Prepare a detailed note to the senior partner by calculating requirements given

as a and b above.