1. You work with an investment company that manages a mutual fund. The mutual fund invests in equity stocks listed on the Ghana Stock Exchange. Currently the expected return on the fund is 18% with standard deviation of 12%. The risk-free rate of return is 14%.

Required: 

(a) Dr. Olufunmi has GHS20,000 to invest in both your fund and the risk-free asset. He demands a required rate of return of 16% on the complete portfolio.

i) How much of his funds must be put into the risky portfolio and how much must be put into the risk-free asset?

2. You are an investment advisor at PT Securities Ltd. You are considering two equity stocks for recommendation to Mr. Dela-Brown, a client of PT Securities. You assessed the risk profile of Mr. DelaBrown and found that his risk-aversion index is negative 1.5. Below is information about the two equity stocks you are considering.

1. Masophe Corporation: The expected return on this stock is 25% with a variance of 0.36.

2. Jul-Tech Ltd: The expected return on this stock is 15% with a standard deviation of 10%.

Required:

(a) Distinguish between speculation and gambling.

(b) Would you say that Mr. Dela-Brown is a risk-averse investor? Explain.

(c) Compute the expected utility from each stock. Considering the expected utility, which of the two stocks would Mr. Dela-Brown be more motivated to invest in?

ii) Considering your answer in i) above and the earlier assumptions, what is the standard deviation of the complete portfolio?

(b) If his risk-aversion index is 4, what is the maximum amount of his funds should be put into the risky portfolio? Explain in a few words.

Answer rating: 100% (QA)

Answer 1 a Dr Olufunmi has GHS20000 to invest in both your fund and the riskfree asset He demands a required rate of return of 16 on the complete port... View the full answer