Mr. Pawan Garg, a wealthy businessman, has approached you for professional advice on investment. He has...

  

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Mr. Pawan Garg, a wealthy businessman, has approached you for professional advice on investment. He has a surplus of Rs. 20 lakhs which he wishes to invest in share market. Being risk averse by nature and a first timer to secondary market, he makes it very clear that the risk should be minimum. Having done some research in this field, you recommend to him a portfolio of two shares - stocks of an oil exploration company ONGD and an oil marketing company BPDL. You tell him that both are reputed, government controlled companies. You have the following market data at your disposal. PeriodMarket return (%) Return (%) on ONGDBPDL 1 2 34 4 5 1 0 6 NLO 1 2 8 - 10 6 18 16 12 (12) -7 8 16 10 14 20 4 1 0 The current market price of a share of ONGD is Rs. 1200 and that of BPDL is Rs. 423. On the future returns of the two stocks and the market, you are able to obtain the 16 8 following forecast from a reputed firm of portfolio managers. State of the Probability Returns (in percentage) on Economy Treas ONGD BPDL Recessio n Normal Boom 0.3 0.4 0.3 ury Bills 7 7 7 9 18 25 15 10 6 Market Index e. What is the scope for appreciation for the two stocks? (2) 14 20 The firm also informs you that they had very recently made a study of the ONGD stock and can advise that its beta is 1.65. Mr. Garg requests you to answer the following questions: a. What is the beta for BPDL stock? b. What is the covariance of the returns on ONGD and BPDL? Use the forecasted returns to calculate this. c. If the forecasted returns on ONGD and BPDL are perfectly negatively correlated (p = -1), what will be expected return from a zero risk portfolio? d. What will be the risk and return of a portfolio consisting of ONGD and BPDL stocks in equal proportions? Mr. Pawan Garg, a wealthy businessman, has approached you for professional advice on investment. He has a surplus of Rs. 20 lakhs which he wishes to invest in share market. Being risk averse by nature and a first timer to secondary market, he makes it very clear that the risk should be minimum. Having done some research in this field, you recommend to him a portfolio of two shares - stocks of an oil exploration company ONGD and an oil marketing company BPDL. You tell him that both are reputed, government controlled companies. You have the following market data at your disposal. PeriodMarket return (%) Return (%) on ONGDBPDL 1 2 34 4 5 1 0 6 NLO 1 2 8 - 10 6 18 16 12 (12) -7 8 16 10 14 20 4 1 0 The current market price of a share of ONGD is Rs. 1200 and that of BPDL is Rs. 423. On the future returns of the two stocks and the market, you are able to obtain the 16 8 following forecast from a reputed firm of portfolio managers. State of the Probability Returns (in percentage) on Economy Treas ONGD BPDL Recessio n Normal Boom 0.3 0.4 0.3 ury Bills 7 7 7 9 18 25 15 10 6 Market Index e. What is the scope for appreciation for the two stocks? (2) 14 20 The firm also informs you that they had very recently made a study of the ONGD stock and can advise that its beta is 1.65. Mr. Garg requests you to answer the following questions: a. What is the beta for BPDL stock? b. What is the covariance of the returns on ONGD and BPDL? Use the forecasted returns to calculate this. c. If the forecasted returns on ONGD and BPDL are perfectly negatively correlated (p = -1), what will be expected return from a zero risk portfolio? d. What will be the risk and return of a portfolio consisting of ONGD and BPDL stocks in equal proportions?