Question

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 fee rate is 3%. Stock A & B are 20% each
of its total portfolio, Stock C and D are 25% and 18% 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. The return for stock A and B
are 25% and 18% while Stock C and D are 12% and 30%. Return for Stock E less 10% than
Stock A.
Randomly you pick two stocks, Stock A & C to look either both of these are positively or
negatively correlated. Before make any decisions either to remain holding in the portfolio or
to sell in the market. You are prefer to maintain those stocks that able to give higher return
and try to minimise the risk.

State 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:
a. Compute the expected return of your portfolio.

b. Compute the portfolio beta.


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


d. Compute the covariance and correlation of Stock A & C.


e. What you find out about your portfolio and from (d). Any suggestion(s)?

Answer 1