Du-Point asset management company intends to invest in two stocks with the following risk and return trade off;

Question

Du-Point asset management company intends to invest in two stocks with the following risk and return trade off; Probability Stock A Stock B 0.1 33% 60% 0.2 20% 30% 0.4 15% 5% 0.3 0% -20% Required a) Calculate the expected return of each stock (3 Marks) b) Calculate the risk of each stock ( 4 Marks) c) Calculate coefficient of variation of each stock ( 2 Marks) d) Calculate the expected return of the portfolio consisting of 50% of each stock e) If you are risk averse investor which stock would you prefer to hold and why f) Distinguish between systematic risk and un-systematic risk giving three examples in each case

Help In Homework · Accepted Answer

a. Expected return of Security A= 33*0.1+20*0.2+15*0.4+0*0.3= 13.3% Expected return of Security B= 60*0.1+30*0.2+5*0.4-20*0.3= 8% b. Risk of Security A Probablity Given Return Expected Return Da Da^2 PDa^2 p (a) (b) (a)-(b)=(c) (c)*(c)=(d) P*(d) 0.1 33 13.3 19.7 388.09 38.809 0.2 20 13.3 6.7 44.89 8.978 0.4 15 13.3 1.7 2.89 1.156 0.3 0 13.3 -13.3 176.89 53.067 102.01 Risk = 102.01^1/2= 10.1% Risk of Security b Probablity Given Return Expected Return Da Da^2 PDa^2 p (a) (b) (a)-(b)=(c) (c)*(c)=(d) P*(d) 0.1 60 8 52 2704 270.4 0.2 30 8 22 484 96.8 0.4 5 8 -3 9 3.6 0.3 -20 8 -28 784 235.2 606 Risk = 606^1/2= 24.617% c. Coefficient of Variance of Stock A= risk/return= 10.1/13.3= 0.7594 Coefficient of Variance of Stock b= risk/return= 24.617/8=3.077125 d. Return of Portfolio consisting of 50% of Security A & B = Retun of A *0.5+Retun of B *0.5\ = 13.3*0.5+8*0.5 = 10.65% e. Since the Coefficient of Variance of Stock A is lower than Coefficient of Variance of Stock B. Thus an risk adverse Investor would prefer Stock A over Stock B. f. Systematic risk is a risk that can never be controlled or eliminated whereas unsystematic risk can be controlled.Unsystematic risk is company specific whereas Systematic risk is country or sector specific. For example, Unsystematic risk is Labour strike or electricity isssues whick can be avoided whereas Systematic risk is like political instability which cannot be avoided by a company. GDP miovement is also an example of Systematic risk.

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Du-Point asset management company intends to invest in two stocks with the following risk and return trade off; Probability Stock A Stock B 0

Expert Solution

Archived Solution

Probablity	Given Return	Expected Return	Da	Da^2	PDa^2
p	(a)	(b)	(a)-(b)=(c)	(c)*(c)=(d)	P*(d)
0.1	33	13.3	19.7	388.09	38.809
0.2	20	13.3	6.7	44.89	8.978
0.4	15	13.3	1.7	2.89	1.156
0.3	0	13.3	-13.3	176.89	53.067
					102.01