QUESTION 3

Arifah is considering letting go one of her investment. The followings are some information related to her portfolio:

Table A: Acquisition Info

	Stock A	Stock B	Stock C
Acquisition price	RM5 per unit	RM2 per unit	RM10 per unit
6-month Average return	3%	2%	2.5%
St. deviation	6%	1.5%	3%
Units owned	1000	500	400

Table B: Portfolio-related info

Covariance between A and B	20
Covariance between A and C	15
Covariance between B and C	-10

Table C: Reports on Potential Return obtained from Stock Analyst Firm

Economic condition in a month time	Probability	Potential return
		Stock A	Stock B	Stock C
Good	0.2	10%	5%	6%
Moderate	0.5	7%	2%	5%
Bad	0.3	3%	-3%	1%

a) Using the historical data as indicator, calculate Arifah portfolio return (hint: assume Arifah is using the weigh based on acquisition information)

(4 marks)

b) What would be her existing portfolio risk? (7 marks)

c) If Arifah is to decide solely on the expected return data, which stock should she let go?

(4 marks)

d) Based on the decision made in question c), what will be the expected portfolio return for Arifah? (hint: assume Arifah is using the weigh based on acquisition information)

(3 marks)

e) What will be the new portfolio risk for Arifah?

(10 marks)

f) Provide simple comment on Arifahs decision by comparing her portfolio return and risk.

(2 marks)