Question

a. Stock Moon and Noon have the following probability distributions of returns: Probability Returns Stock Moon Stock Noon 20% 10% 12% 15% 2% 0.3 0.4 0.3 -2% From the above information, calculate for each stock: i) The expected rate of return. (3 Marks) ii) The standard deviation. (3 Marks) iii) The coefficient of variation. (2 Marks) iv) Based on your calculation in part (iii), decide on the stock that you should invest on. Justify your answer. (4 Marks) b. Suppose you are the financial manager of a RM2 million investment fund. The fund consists of 3 stocks with the following investments and betas: Stock Bulan Investment RM 350,000 450,000 1,200,000 Beta 1.50 1.25 0.75 Bintang Matahari The market's required rate of return is 13% and the risk-free rate is 5%. Given the above information, calculate: i) The beta of the investment. (4 Marks) ii) The fund's required rate of return. ... (4 Marks)

Answer 1

A 20 ANSWER 1 a: Calculation of Expected Return Probability Return on Stock Moon Return on Stock Noon 0.3 0.4 0.3 -2% 10% 15% 20% 12% 2% Expected Return 7.90% 11.40% b: Calculation of Standard Deviation Standard Deviation 6.80% 6.99% c: Calculation of Coefficient of variation Coefficient of Variation 0.8612 0.6130 d: Decision Based on coefficient of Variation, we should invest in Stock STOCK NOON since it has a lower coefficient of variation

20 ANSWER 1 a: Calculation of Expected Return Probability Return on Stock Moon Return on Stock Noon 0.3 0.4 -0.02 0.1 0.15 0.2 0.12 0.02 0.3 Expected Return =(C26*$B$26)+(C27*$B$27)+(C28*$B$28) =(D26*$B$26)+(D27*$B$27)+(D28*$B$28) b: Calculation of Standard Deviation Standard Deviation =((C26-C30)^2*$B$26+(C27-C30)^2*$B$27+(C28-C30)^2*$B$28)^0.5 =((D26-D30)^2*$B$26+(D27-D30)^2*$B$27+(D28-D30)^2*$B$28)^0.5 c: Calculation of Coefficient of variation 40 Coefficient of Variation |=C35/C30 =D35/D30 d: Decision Based on Coefficient of Variation, we should invest in Stock STOCK NOON since it has a lower coefficient of variation