Q. 1) An investor wishes to construct a portfolio consisting of Stock A and Stock B. The expected returns on the two stocks A and B are 10 percent and 15 percent, and the standard deviations of the returns are 20 percent and 25 percent respectively. The correlation coefficient between their returns is -0.5. The investor is free to choose the investment proportions subject to the requirement that the sum of the allocation of funds in stock A (w_A) and stock B (w_B) is1.

a.what will be representative selection of values for w_A from 0, 0.2, 0.4, 0.6, 0.8 and 1 and calculate expected return and standard deviation of the portfolio for each 6 pairs.

b.From the given information, calculate the optimal proportion of funds in stock A and stock B in order to achieve lowest level of risk.

Q. 2) A share is currently selling for Rs. 120. There are two possible prices of the share after one year: Rs. 132 or Rs. 105. Assume that risk-free rate of return is 9% per annum. How many call options will you combine with the stock to construct the perfect hedge? What is the value of a one-year call option (European) with an Exercise price of Rs. 125?

Q3) Assume that you plan to construct a portfolio aimed at achieving your stated objectives. The portfolio can be constructed by allocating your money to the following asset classes: common stock, bonds, and short-term securities.

a.Identify state and comment your investment objectives.

b.Determine an asset allocation to these three classes of assets considering your stated investment objectives. Explain your decision.

c.What reasons could cause you to make changes in your asset allocation?