Financial Management (MGT201) Marks= 15
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
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
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.
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