Subject: Investment and Portfolio Management

You have recently graduated as a major in finance and have been hired as a financial planner by Jubilee Securities, a financial services company. Your boss has assigned you the task of investing Rs.1.000.000 for a client who has a 1-year investment horizon. You have been asked to consider only the following investment alternatives: T-bills, stock A, stock B. stock C, and market index. . The economics cell of Jubilee Securities has developed the probability distribution for the state of the economy and the equity researchers of Jubilee Securities have estimated the rates of return under cach state of the economy. You have gathered the following information from them: Returns on Alternative Investments State of the Economy Market Probability T-Bills Stock A Stock B Stock C Portfolio Recession 0.2 6.0% (18.0%) 25.0% (6.0%) (10.0%) . Normal 0.5 6.0 20.0 5.0 15.0 16.0 Boom 0.3 6.0 42.0 (12.0) 26.0 30.0 Your client is a very curious investor who has heard a lot relating to portfolio theory and asset pricing theory. He requests you to answer the following question: a. What is the expected return and the standard deviation of return for stocks A, B, C, and the market portfolio? b. What is the covariance between the returns on A and B? returns on A and C? Returns on B and C? e. c. What is the coefficient of correlation between the returns of A and B? d. What is the expected return and standard deviation on a portfolio in which the weights assigned to stocks A, B, and Care 0.4.0.4, and 0.2 respectively? The beta coefficients for the various alternatives, based on historical analysis, are as follows: Security Beta T-Bills 0.00) 1.30 -0.60 C 0.95 i. What is the SML relationship? ii. What is the alpha for stocks A, B, and C? f. Suppose the following historical retums have been carned for the stock market and the stock of company D. Period Market D 1 -5% -12% 2 4% 6% 3 8% 12% 4 1.5% 20% 5 9% 6% Required: What is the beta for stock D? How would you interpret it? g. What is Capital Market Line (CML.)? Security Market Line (SML.)? And how is CML. related to SML