Lumbini Furniture (Pvt) Ltd. is considering these two projects: Project X and Project Y. Each project has a cost of Rs 20,000,000, and the cost of…
BBS Fundamentals of Financial Management · 2080 · Solved Question with Answer
Lumbini Furniture (Pvt) Ltd. is considering these two projects: Project X and Project Y. Each project has a cost of Rs 20,000,000, and the cost of capital for each project is 15 percent. The expected net cash flows are as follows:
| Year | Expected Net Cash Flows (in thousand ) | |
| Project X | Project Y | |
| 0 | (Rs 20,000) | (Rs 20,000) |
| 1 | 8,000 | 12,000 |
| 2 | 8,000 | 7,000 |
| 3 | 8,000 | 5,000 |
| 4 | 8,000 | 4,000 |
a. Calculate the expected return and standard deviation of Stock A and Stock B.
b. What are the covariance and correlation coefficient between Stock A and Stock B.
c. If you form a portfolio of Stock A and Stock B comprising 40 percent wealth in Stock A and the rest in Stock B, calculate the portfolio return and standard deviation. Also interpret the results.
d. What advantage an investor can achieve by investing his/her fund in the combination of stock A and Stock B instead of investing total fund either in stock A or Stock B? Explain.