You are now evaluating the expected performance of two equity shares, A and B, and have gathered the following information about the stocks:

Stocks Average Return (%) Total Risk (%) Beta

A 15.5 28. 1.8

B 13.0 34 1.5

(The total risks are expressed in standard deviation terms).

Assume that the capital asset pricing model (CAPM) is a good description of stock price returns. The market expected return is 10%, with the standard deviation of 12%. The risk-free rate of return is 4%. Wilson, one of your clients, is currently holding 40% A and 60% B in his risky portfolio.

Required:

(a) Based on your analysis, recommend to your client whether he should keep, sell or buy more, of these equities.

(b) Advise your client the riskiness of each equity in detail.

(c) Suppose that your clients degree of risk aversion is A= 7. Advise your client what proportion, y, of the risky portfolio should be invested in his fund. What is the expected value and standard deviation of the rate of return on your clients optimized complete portfolio?