QUESTION 3 (23 MARKS)

Alan, a chartered financial analyst (CFA), is willing to invest two stocks, Bloom stock and Stars stock. He has collected the data on both stocks from Bursa Malaysia. The data as follows:

		Stock Bloom	Stock Stars
State of Economy	Probability	Return (%)	Return (%)
Recession	0.35	-20	30
Normal	0.40	10	20
Boom	0.25	70	50

Alan has RM100,000 and he plans to invest RM60,000 in Bloom and the remainder in Stars. The market price for Bloom and Stars are RM12 and RM25 respectively. Beta for each stock is 1.2 and 0.5.

Required:

1. Compute the expected return and standard deviation for these two stocks.

(8 marks)

(CLO2:PLO6:C4)

2. Compute the expected return and standard deviation of the portfolio.

(6 marks)

(CLO2:PLO6:C6)

3. If Alan decide to invest all 100% in Bloom stock, criticise your findings.

(4 marks)

(CLO2:PLO6:C6)

4. Evaluate the beta portfolio and each of the stocks. Assess the riskiness of the stocks based on standard deviation and the beta.