Question
XYZ limited own 3 stocks and has estimated the following probabilities of returns Outcome Probability Return of A% Return of B % Return of C
- XYZ limited own 3 stocks and has estimated the following probabilities of returns
Outcome | Probability | Return of A% | Return of B % | Return of C % |
1 | 0.3 | -10 | 10 | 0 |
2 | 0.2 | 0 | 10 | 10 |
3 | 0.3 | 10 | 5 | 15 |
4 | 0.2 | 20 | -10 | 5 |
- Calculate the expected return and risk of the individual security. (2mks)
- Advise the an investor on the best two asset portfolio stating other factors the investor will consider during portfolio construction (9marks)
2. The rates of return of stock A and the market portfolio for the 12 months are given below:
Month | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
Stock A (%) | 10 | 15 | 18 | 14 | 16 | 16 | 18 | 4 | 4 |
Market Portfolio (%) | 12 | 14 | 13 | 10 | 9 | 13 | 14 | 7 | 1 |
- Compute the average return of stock A and the market. (1mks)
- Determine the variance of the return of stock A and the market. (1mks)
- Find the covariance between the return of stock A and the market portfolio. (1mks)
- Estimate the beta factor for stock A. (1mks)
3.Sharpes measure is a better evaluation criteria for the performance of a portfolio manager than Treynors measure. Discuss ( 4 marks)
4. Explain why issues of selectivity, timing and diversification are important when forming the investment portfolio (6 marks)
5. Evaluate the applications of CAPM in corporate financial decision making (6 marks)
6. Discuss whether or not portfolio theory and CAPM give the same portfolio risk measure
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