Question: You are now evaluating the expected performance of two equity shares, A and B, and have gathered the following information about the stocks: Stocks Average

You are now evaluating the expected performance of two equity shares, A and B, and have gathered the following information about the stocks:

Stocks Average Return (%) Total Risk (%) Beta

A 15.5 28 1.8

B 13.0 34 1.5

(The total risks are expressed in standard deviation terms).

Assume that the capital asset pricing model (CAPM) is a good description of stock price returns. The market expected return is 10%, with the standard deviation of 12%. The risk-free rate of return is 4%. Wilson, one of your clients, is currently holding 40% A and 60% B in his risky portfolio.

(a) Based on your analysis, recommend to your client whether he should keep, sell or buy more, of these equities.

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