Assume that after completion of your MBA you have started working as a financial planner at Askari Capital Limited. In a second week of Job you have got assignment to invest Rupees 100,000 for a client. Because the funds are to be invested in a business at the end of 1 year, you have been instructed to plan for a 1-year holding period. Moreover, your manager has restricted you to the investment alternatives in the following table, shown with their probabilities and associated outcomes. (For now, disregard the items at the bottom of the data; you will fill in the blanks later.) Estimated rate of returns State of the Probability T-Bills Nescom Nawab PK_Steel Pak Market portfolio Recession 0.1 3% -14.25 12.25 1.75 -9.75 Below average 0.2 3% -4.75 5.25 -8.25 -2.75 Average 0.4 3% 6.25 -0.5 0.25 3.75 Above average 0.2 3% 13.75 -2.5 19.25 11.25 Boom 0.1 3% 21.25 -10 11.75 17.75 Expectred Returns St. Deviation 0% CV Beta Askari Capital staff has estimated the probability values for the state of the economy, and also estimated the corresponding rate of return on each alternative under each state of the economy. Nescom. is technology firm, Nawab collects past-due debts, and PK_Steel manufactures steel products. Askari capital also maintains a “market portfolio” that owns a market-weighted fraction of all publicly traded stocks on Pakistan exchange market; you can invest in that portfolio and thus obtain average stock market results. Given the situation described, answer the following questions: Calculate the expected rate of return on each alternative. You should recognize that basing a decision solely on expected returns is appropriate only for risk neutral individuals. Your client is risk-averse, the riskiness of each alternative is an important aspect of the decision. One possible measure of risk is the standard deviation of returns. Calculate this value for each alternative.
Assume that after completion of your MBA you have started working as a financial planner at Askari Capital Limited. In a second week of Job you have got assignment to invest Rupees 100,000 for a client. Because the funds are to be invested in a business at the end of 1 year, you have been instructed to plan for a 1-year holding period. Moreover, your manager has restricted you to the investment alternatives in the following table, shown with their probabilities and associated outcomes. (For now, disregard the items at the bottom of the data; you will fill in the blanks later.)
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Estimated rate of returns |
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State of the |
Probability |
T-Bills |
Nescom |
Nawab |
PK_Steel |
Pak Market portfolio |
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|
Recession |
0.1 |
3% |
-14.25 |
12.25 |
1.75 |
-9.75 |
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Below average |
0.2 |
3% |
-4.75 |
5.25 |
-8.25 |
-2.75 |
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Average |
0.4 |
3% |
6.25 |
-0.5 |
0.25 |
3.75 |
|
|
Above average |
0.2 |
3% |
13.75 |
-2.5 |
19.25 |
11.25 |
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Boom |
0.1 |
3% |
21.25 |
-10 |
11.75 |
17.75 |
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Expectred Returns |
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St. Deviation |
0% |
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CV |
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Beta |
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Askari Capital staff has estimated the probability values for the state of the economy, and also estimated the corresponding
- Calculate the expected rate of return on each alternative.
- You should recognize that basing a decision solely on expected returns is appropriate only for risk neutral individuals. Your client is risk-averse, the riskiness of each alternative is an important aspect of the decision. One possible measure of risk is the standard deviation of returns. Calculate this value for each alternative.
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