Just at the turn of New Year of 2021, you have been appointed as a consultant and strategic planning specialist of large asset Management Company. One client has approached you and keen to help him identifying some stocks to be invested with his hard earned savings. Client is an educated person and having a little knowledge about investments. But, he brought to you following information pertaining to two companies (Company ABC and XYZ) with probability distributions of demand occurring to their products and expected future returns.

Probability of demand occurs for the products	ABC Company	XYZ Company
0.1	(10%)	(35%)
0.2	2%	0%
0.4	12%	20%
0.2	20%	25%
0.1	38%	45%

Prepare a report with calculated values of expected rate of return and risk of two companies and required to advise a client which company is suitable for investment.

In addition to above, client claims that he possesses Rs. 4 million and at present these funds with the fixed deposit account in one of the government banks which accumulates 5.75% per annum. Due to continuous decrease in fixed deposit rates given by the bank, he wanted to withdraw money from the bank and planning to invest in stocks. Client further stated that he prefers to invest in following companies and would like to distribute rupee amounts in the following manner.

Stock	Investment	Beta
Amex	Rs. 400,000	1.5
Bartleet	Rs. 600,000	(0.50)
Cosmos	Rs. 1,000,000	1.25
Darly Buttler	Rs. 2,000,000	0.75

Prepare a brief report showing expected rate of return of this investment to the client of this portfolio with prevailing rates of market rate of return and risk free investment in the economy (In your brief report you are required to mention clearly your assumptions).

Answer rating: 100% (QA)

SOLUTION To calculate the expected rate of return and risk of two companies we can use the following formula Expected Rate of Return Probability of De... View the full answer