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Learning Objectives:
The objective of this assignment is to enable the students to:
• Calculate the expected return of a stock while making investment decision
• Measure the risk of a stock
• Compare two investments on the basis of expected risk & return and make appropriate
decision according to the nature of investor.
Case:
Mr. Shakeel is planning to invest his money in shares. He visited stock exchange broker to obtain
relevant information about the companies that may benefit him in selecting best companies for
investment.
Stock exchange broker provided him a range of companies belonging to different sectors. After
thorough discussion and keeping in view the suggestions of stockbroker, Mr. Shakeel shortlisted
three companies which are listed below:
1. Company A is the car manufacturing company. Its stock is being traded at Rs.125 in the
stock exchange. There is news that the company is going to launch its new product in the
market that is expected to increase its stock price.
2. Company B is a textile company. Its 5 years historical records show that the management is
very efficient in its operations and really cares for its shareholders’ wealth. The success of
the company is reflected by the continuous increase of its stock price from last 5 years. Its
stock is being traded at Rs.130.
3. Company C belongs to milk and dairy sector. Past historical records show that its stock
price is least affected by any information and changes in the economy but whenever the
demand of milk and dairy products increases, its stock’s price also increases. In winter
there are chances that the price of its stock will increase while its current price is Rs.120.
Mr. Shakeel is well aware of the country’s economic conditions that may result in depression,
recession, normal and boom with equal and identical likelihood. He has the following
information:
Economic Conditions A’s Stock Price (Rs.) B’s Stock Price (Rs.) C’s Stock Price (Rs.)
Depression 90 110 115
Recession 117 115 118
Normal 130 122 125
Boom 150 140 129
Requirements:
1. Calculate expected Risk and Return of Stock A.
2. Calculate expected Risk and Return of Stock B.
3. Calculate expected Risk and Return of Stock C.
4. Suppose, Mr. Shakeel is Risk Averse, then in which company he will invest and why?
(Show complete workings and calculations)
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Replies to This Discussion

Possibility

Probability

Company A

Payoff x probability

 

1

¼

90

22.5

2

¼

117

29.25

3

¼

130

32.5

4

¼

150

37.5

Expected value= sum of(probability times payoff)=121.75

 

 

is this approach is right.

Payoff x prob kasy aya? kindly explain.

I think you are right.

Please Discuss here about this assignment.Thanks

Our main purpose here discussion not just Solution

We are here with you hands in hands to facilitate your learning and do not appreciate the idea of copying or replicating solutions.

Company B is the best investment as compare to A & C, because its expected value is more then other both, do you agree?

B’s Stock Price (Rs.)

130 -20 +20

110/4=27.75

115/4=28.75

122/4=30.5

140/4=35

expected value 122

you have to find variance and standard deviation minimum standard deviation is less risky commpany c has minimun standard deviation so comapny C is the selection of mr shakeel.

please find variance and standard deviation too. variance and standard devaition show the risk it is given in lecture 12 in handout "evaluating risk".

plz give example / formula for variance as well S deviation for guidence.

Thanks yasir

B calculation

110/4=27.5

115/4=28.75

122/4=30.5

140/4=35

how B i=122?

Expected value 121.75

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