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Topic: Selection of Stock on the basis of Risk and Return

Last Date   25-jan-2018

Discussion Question:

Selection of an efficient stock from the stock market is a crucial decision that is not only vital for investment but also pave the ways for value addition.  Stocks are selected on returns and volatility basis that carries a tradeoff.  In this context, calculation of required return (RR) with the help of Security Market Line (SML) and stock beta may help a lot to any investor. Assume you are going to invest in stock exchange where you are a new investor and you are facing an issue of the selection of stock among different alternative available in the market. Follwoing information regarding stocks and market is available to you:

Particulars Stock A (%) Stock B (%) Market (%)
Standard Deviation 27 28 18
Correlation of stocks with market 0.8 0.5  
Market Return     15
Risk Free Return     8

Based on above information:

  1. You are required to calculate required rate of return of Stock A and Stock B
  2. Declare yourself either a risk taker investor or risk averse investor
  3. Considering your risk appetite (either risk taker or risk averse) you are required to suggest which Stock should be selected. Provide a reason to support your selection (in bullet form). Your selection should be based on your risk appetite assumption i.e. first declare yourself as either risk taker or risk averse investor and then select stock based on calculations in part 1.

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Replies to This Discussion

This solution has a minor mistake.. let me correct,,In stoc A value is 27*0.8/18..

stock a = 27*0.8/18

stock a = 1.2

mathtype se equation copy kr kr GDB me kaise paste krna ha mj se ni ho rha ha plz jaldi bata de 

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Date extend to 27-01-2018

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