Risk and return of investment securities are two important factors considered for the construction of portfolios by the investors. Maximization of return is the key consideration for investors but returns of securities do not move in isolation. Investors have to consider the risk attached with the returns of all securities in a portfolio. Therefore, selection of securities for a portfolio is largely dependent upon correlation among securities. A right combination of securities secures the returns for investors by minimizing risk of the portfolio. Therefore, it is important to analyze individual risk and returns of the securities as well as the association among securities. Mr. Adil is planning to construct a portfolio of two stocks for which he has selected stock A but he is confused to choose among Stock B, C and D. Considering the significance of correlation among securities you are required to help Adil in selecting right stock for portfolio that will minimize the risk. Following is the information about four stocks that are available for construction of a portfolio: Stocks Standard devintion Correlation Coefficient А B В С D Expected Investment in Stock Rs. 65.000 Rs. 35.000 Rs. 35,000 Rs. 35.000 0.25 0.1 0.4 0.3 PAN-0.5 PAO 10.5 PAD = -0.25 Required: 1. Calculate weightage of each stock if Mr. Adil has total investment of Rs. 100,000 (each portfolio can have only two stocks while Stock A is mandatory for each portfolio) 2.
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Answer:
Risk and return of investment securities are two important factors considered for the construction of portfolios by the investors. Maximization of return is the key consideration for investors but returns of securities do not move in isolation. Investors have to consider the risk attached with the returns of all securities in a portfolio. Therefore, selection of securities for a portfolio is largely dependent upon correlation among securities. A right combination of securities secures the returns for investors by minimizing risk of the portfolio. Therefore, it is important to analyze individual risk and returns of the securities as well as the association among securities. Mr. Adil is planning to construct a portfolio of two stocks for which he has selected stock A but he is confused to choose among Stock B, C and D. Considering the significance of correlation among securities you are required to help Adil in selecting right stock for portfolio that will minimize the risk. Following is the information about four stocks that are available for construction of a portfolio: Stocks Standard devintion Correlation Coefficient А B В С D Expected Investment in Stock Rs. 65.000 Rs. 35.000 Rs. 35,000 Rs. 35.000 0.25 0.1 0.4 0.3 PAN-0.5 PAO 10.5 PAD = -0.25 Required: 1. Calculate weightage of each stock if Mr. Adil has total investment of Rs. 100,000 (each portfolio can have only two stocks while Stock A is mandatory for each portfolio) 2.
Answer:
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