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Financial Management (MGT201) Marks= 15
Assignment #01
Portfolio Risk
Risk and return of investment securities are two important factors considered for the construction
of portfolios by the investors. Maximization of return is the key consideration for investors but
returns of securities do not move in isolation. Investors have to consider the risk attached with
the returns of all securities in a portfolio. Therefore, selection of securities for a portfolio is
largely dependent upon correlation among securities. A right combination of securities secures
the returns for investors by minimizing risk of the portfolio. Therefore, it is important to analyze
individual risk and returns of the securities as well as the association among securities. Mr. Adil
is planning to construct a portfolio of two stocks for which he has selected stock A but he is
confused to choose among Stock B, C and D. Considering the significance of correlation among
securities you are required to help Adil in selecting right stock for portfolio that will minimize
the risk. Following is the information about four stocks that are available for construction of a
portfolio:
Stocks Expected
Investment in
Stock
Standard
deviation
Correlation
Coefficient
A Rs. 65,000 0.25
ρA,B = -0.5
ρA,C = 0.5
ρA,D = -0.25
B Rs. 35,000 0.1
C Rs. 35,000 0.4
D Rs. 35,000 0.3
Required:
1. Calculate weightage of each stock if Mr. Adil has total investment of Rs. 100,000 (each
portfolio can have only two stocks while Stock A is mandatory for each portfolio)
2. Calculate variance of three portfolios (each portfolio can have only two stocks while
Stock A is mandatory for each portfolio) :
Portfolio 1 (You have to choose combination of stocks yourself)
Portfolio 2 (You have to choose combination of stocks yourself)
Portfolio 3 (You have to choose combination of stocks yourself)
3. On the basis of calculated variance of portfolios, suggest which combination is best for
Mr. Adil who wishes to minimize the risk
NOTE: Formula and complete working is mandatory in each part, provide complete
calculations in order to avoid marks deduction.
IMPORTANT NOTE: 24 hours extra / grace period after the due date is usually available to
overcome uploading difficulties. This extra time should only be used to meet the emergencies
and above mentioned due dates should always be treated as final to avoid any inconvenience.
IMPORTANT INSTRUCTIONS/ SOLUTION GUIDELINES/ SPECIAL
INSTRUCTIONS DEADLINE:
• Make sure to upload the solution file before the due date on VULMS
• Any submission made via email after the due date will not be accepted
FORMATTING GUIDELINES:
• Use the font style “Times New Roman” or “Arial” and font size “12”
• It is advised to compose your document in MS-Word format
• You may also compose your assignment in Open Office format
• Use black and blue font color only RULES FOR MARKING
Please note that your assignment will not be graded or graded as Zero (0), if:
• It is submitted after the due date.
• The file you uploaded does not open or is corrupt.
• It is in any format other than MS-Word or Open Office; e.g. Excel, PowerPoint, PDF etc.
• Not submitted as per given format
• It is cheated or copied from other students, internet, books, journals etc.
Note related to load shedding:
Dear students,
As you know that semester activities have started and load shedding problem is also prevailing in
our country. Keeping in view the fact, you all are advised to post your activities as early as
possible without waiting for the due date. For your convenience; activity schedule has already
been uploaded on VULMS for the current semester, therefore no excuse will be entertained after
due date of assignments or GDBs.
Best of Luck!!

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