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Financial Management

Fall 2006 Assignment No. 04 Semester Fall 2006 Financial Management (MGT 201)

Assignment # 04

Max Marks: 10

!estion 01:
An investor places 30% of his funds in Security A and the balance in Security B. The expected returns on A and B are 12% and 18% respectively. The standard deviations of returns on A and B are 20% and 1!% respectively. "a# $alculate the expected return on the portfolio. "b# $alculate the %ariance of returns on the portfolio assu&in' that the correlation bet(een the returns on the t(o securities is) *. 1.00 **. 0.+ ***. 0 *%. , 0.+ "c# $o&&ent on your results in -art.b above. .ar/s) "10201#

!estion 02:
An investor holds a portfolio that co&prises of 20% stoc/ A 30% stoc/ B and !0% stoc/ $. The standard deviations of returns on Stoc/s A B and $ are 22% 1!% and 10% respectively and the correlation bet(een returns on each pair of securities is 0.1. -repare a variance,covariance &atrix for these three securities and use the &atrix to calculate the variance and standard deviation of returns for the portfolio. .ar/s) "3#

!estion 0":
The ris/ free rate of return is currently 8% and the &ar/et ris/ pre&iu& is esti&ated to be 1%. The expected returns and betas of four shares are as follo(s) Share A B 2xpected 3eturn "%# 13.0 1+.1 Beta 0.+ 1.1

$ 14.0 1.1 *dentify that (hich shares are undervalued overvalued or correctly valued based on the $A-.. .ar/s) "10101#

Virtual University of Pakistan

Financial Management

Fall 2006

Assignment # 04

*nstructions)
1. 2. 3. 4. !. 5se a 12,point font in Ti&es 6e( 3o&an. S#o$ all t#e necessar% calc!lations . This Assi'n&ent covers 7ecture 23 to 7ecture 2+ of your course. &!e 'ate (or t#e s!)mission o( Assignment is *an!ar% 0+, 200-. 5pload your assi'n&ent (ith in due date and ti&e. 6o assi'n&ent (ill be accepted after the due date and ti&e. 1. No cre'it $ill )e gi.en to co/ie' assignments.

Virtual University of Pakistan