Question 3

As a portfolio manager, you have been assigned to manage the Alpha Trust Fund. Alpha Trust Fund has a total investment of RM100 million in five blue chips stocks as shown in the table below.

Blue chip stock	Amount invested (million)	Beta value
P	30	0.5
Q	25	2.0
R	15	4.0
S	20	1.0
T	10	3.0
	100

The risk free rate is estimated at 6% and the expected market return has the following probability distribution.

Probability	Outcomes
0.1	6%
0.2	8
0.4	10
0.2	12
0.1	14

1. Compute the portfolio return and beta for Alpha Trust Fund. Is the performance of Alpha Trust Fund better than the market performance?

(5 marks)

2. Suppose you identify three stocks Y, Z and AA to add to the Alpha Trust Fund. The investment required is RM25 million each and the relevant information about the two stocks are as below:

Stock	Return (%)	Beta
Y	20	4.0
Z	10	0.2
AA	10.8	1.2

Which stock should you recommend to the top management of Alpha Trust Fund?

(10 marks)

3. Show that adding the recommended stock as identify in (c), the performance of Alpha Trust Fund is better than before using portfolio performance evaluation and attribution analysis.

(25 marks)