Read the following information carefully and answer the questions that follow: Ramhari is an employee of commercial bank has just got retirement fund…
2025 · Solved Question with Answer
Read the following information carefully and answer the questions that follow:
Ramhari is an employee of commercial bank has just got retirement fund from his bank. He received Rs 10 million for investment in stock portfolio. Observing the current situation of stock market and possible increase in Nepalese market he has shown interest to investing in stocks listed in Nepal Stock Exchange. He asked your advice for selecting a stock or a portfolio of stocks. For that purpose, you have selected, among many stocks, A and B. The amount of investment, returns and risks of Stock A and B are given below:
| Stock | Amount of investment | Expected returns | Standard deviation of returns |
| A | Rs 9 million | 10% | 5% |
| B | Rs 1 million | 15 | 10 |
a. Calculate expected return and risk of the investor's portfolio consisting of Stock A and Stock B if correlation between Stock A and Stock B is – 0.50. Is the portfolio less or more risky than individual investments (i.e. investment in Stock A or Stock B separately)?
b. Assume that the investor is willing to reduce the risk by changing proportion between Stock A and Stock B. Calculate how much should the investor investment in Stock A and Stock B? Also calculate portfolio return and risk of such portfolio.
c. Ramhari wanted to invest Rs 5 million on government securities that earns 5 percent return and the remainder in the portfolio constructed in part (a). What will be the risk and return of the new complete portfolio?
d. Construct an optimal risky portfolio (combination of Stock A, B and government securities) and its expected return and risk.