Assignment 01

Topic: Risk and Return Marks= 20

Investment decisions largely depend upon risk and return factors. Investors have to
consider both risk and the return to maximize their profits. In an effort to increase the
return, investors have to bear a high risk. Mostly investors are risk-avers and they try
to reduce the risk by using different techniques. Among different techniques of risk
reduction, diversification is the most commonly used method of reducing the risk.
Diversification is attained through adding different securities to form a portfolio
which helps in reducing the risk. A well diversified portfolio not only reduces the risk
but also increases the profit for the investor. A rational investor tries to construct a
portfolio that maximizes the risk and minimizes the return.

Suppose Mr. Ahmed has some money to invest in stock market and he is initially
considering following two stocks for portfolio construction:

Stock A Stock B
Probability of Return Probability of Return
occurrence of occurrence of
return return
35% 15% 20% 15%
40% 20% 30% 20%
25% 15% 50% 16%

You are required to help Mr. Ahmed to analyse risk and return of stocks and to
allocate a suitable proportion between two stocks. In order to help him, you are
required to:

 Calculate expected return of each stock

 Calculate risk for each stock
 Based on risk and return of stocks, you have to allocate 40:60 proportion of Mr.
Ahmed’s investment between the two stocks. Note that Mr. Ahmed is a risk
averse investor

NOTE: Take answers up-to two decimal points. Formulas and working in each part
is mandatory as these carry marks.

IMPORTANT INSTRUCTIONS/ SOLUTION GUIDELINES/ SPECIAL

INSTRUCTIONS DEADLINE:
 Make sure to upload the solution file before the due date on VULMS
 Any submission made via email after the due date will not be accepted

FORMATTING GUIDELINES:
 Use the font style “Times New Roman” or “Arial” and font size “12”
 It is advised to compose your document in MS-Word format
 You may also compose your assignment in Open Office format
 Use black and blue font color only

RULES FOR MARKING

Please note that your assignment will not be graded or graded as Zero (0), if:
 It is submitted after the due date.
 The file you uploaded does not open or is corrupt.
 It is in any format other than MS-Word or Open Office; e.g. Excel, PowerPoint,
PDF etc.
 Not submitted as per given format
 It is cheated or copied from other students, internet, books, journals etc.

Note related to load shedding:

Dear students, As you know that semester activities have started and load shedding
problem is also prevailing in our country. Keeping in view the fact, you all are
advised to post your activities as early as possible without waiting for the due date.
For your convenience; activity schedule has already been uploaded on VULMS for
the current semester, therefore no excuse will be entertained after due date of
assignments or GDBs.

Best of Luck!!