Assume you are a portfolio manager at JS Global
Capital Ltd. Recently you came across three attractive stocks and
want to create a portfolio investment in these three stocks. The
details of the stocks are given below:
Company name Volatility
(Standard deviation) Weight in Portfolio Correlation with the
market portfolio
Meezan Bank Ltd 12% 0.25 0.40
Lucky Cement Ltd 25% 0.35 0.60
KE Ltd 13% 0.40 0.50
The expected return on the market portfolio is 8% and its
volatility is 10%. The risk-free rate based on central bank’s
discount rate is 3%. (1.5 marks each)
a. Calculate each of the stock’s expected return and risk (beta) as
compared to the market.
b. What should be the expected return of the portfolio based on
values calculated in part a.
c. Calculate the beta of the portfolio? what does it tells
regarding the riskiness of the portfolio?
d. Using the values from part c, can you calculate the expected
return of the portfolio? Is it similar to your answer in part b?
Why or why not?
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