MGT201 GDB
Solution
Discussion Question:
Selection of an efficient stock from the stock market is a crucial decision that is not only vital for investment but also paves the ways for value
addition. Stocks are selected on a returns and volatility basis that
carries a tradeoff. In this context, the 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 a 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. Following information regarding
stocks and market are 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
|
||
Stock A;
Standard
Deviation =27%
Beta stock A= σ A ρ AM / σ M
=1.2
=8+ (15-8)1.2
=8+
(7)1.2
=8+8.4
=16.4
Stock B;
Standard
Deviation =28%
Beta stock B=σ B ρ BM /σ M
=0.777
8+ (15-8)0.777
=8+ (7)0.777
=8+5.439
=13.439
2.
Declare yourself either a risk-taker investor or risk
averse investor
Answer; the above calculation
represents the low value as compare with S.D then this company risk taker
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.
Answer; Stock(B) needed more investment as
compared to stock(A) because stock (B) have only Return 13.439 on the other hand stock (A) represents the return of 16.4 so we make an investment in stock
(B).
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