Suppose you are the manager of a mutual fund and hold a RM10 million stock portfolio. The required market risk premium is 6.5% and the risk free rate is 3%. Stock A and B is RM2,000,000 each, Stock C is RM2,500,000 and D is RM1,800,000 and the remainder goes to Stock E. Beta for Stock A, B, C, D and E are 0.75, 1.30, 1.6, 0.5 and 1.2 respectively. The return for stock A and B are 25% and 18% respectively, while Stock C and D are 12% and 30% respectively. The return for Stock E is less than 10% of Stock A.

The following information is available about Stock A and Stock C for your analysis.

Sate of economy	Boom	Normal	Recession
Probability	0.3	0.5	0.2
Stock A return	20%	10%	7%
Stock C return	-15%	12%	30%

Required:

1. Compute the expected return of your portfolio.

(3 marks)

(CLO1:PLO1:C3)

2. Compute the portfolio beta.

(3 marks)

(CLO1:PLO1:C3)

3. Compute the expected return and standard deviation for Stock A and Stock C.

(6 marks)

(CLO1:PLO1:C3)

4. Compute the covariance and correlation of Stock A and C.

(4 marks)

(CLO1:PLO1:C3)

5. Interpret the result from (a) and (b) on its riskiness? Compare the outcome between Stock A and C from (c). Discuss your result from (d).

(5 marks)

(CLO1:PLO2:C4)