Assume you are a portfolio manager at JS Global Capital Ltd. Recently you came across three attractive stocks and want to create a portfolio investment in these three stocks. The details of the stocks are given below:
Company name Volatility Weight in Portfolio Correlation with the market portfolio
(Standard deviation)
Meezan Bank Ltd 12% 0.25 0.40
Lucky Cement Ltd 25% 0.35 0.60
KE Ltd 13% 0.40 0.50
The expected return on the market portfolio is 8% and its volatility is 10%. The risk-free rate based on central bank's discount rate is 3%.
a. Calculate each of the stock's expected return and risk (beta) as compared to the market.
b. What should be the expected return of the portfolio based on values calculated in part a.
c. Calculate the beta of the portfolio? what does it tells regarding the riskiness of the portfolio?
d. Using the values from part c, can you calculate the expected return of the portfolio? Is it similar to your answer in part b? Why or why not?
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As a well-informed investor, you naturally want to know the expected return of your portfolio—its anticipated performance and the overall profit or loss it's racking up. Expected return is just that: expected. It is not guaranteed, as it is based on historical returns and used to generate expectations, but it is not a prediction.
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