Stock Markets: Ques for practice Q.1) An investor has decided to invest Rs.

1, 00,000 in the stocks of two companies, i.e. ABC Company and XYZ Company. The projections of returns from the stocks of these two companies along with their probabilities are as follows: Probability 0.20 0.25 0.25 0.30 ABC Company 12% 14% -7% 28% XYZ Company 16% 10% 28% -2%

You are required to a. Comment on the return and risk of investment in individual stocks b. Compare the risk and return of these two stocks with a portfolio of these stocks in equal proportions

Q2) The current price of stock A & stock B are Rs. 80 and Rs. 60 respectively. At the end of the year, the price of stocks A & B and their associated probabilities are given below. Stock A (Rs.) 74 80 85 Stock B (Rs.) 55 60 66 Probability 0.30 0.40 0.30

Given this data, which stock should an investor choose?

Q.3 On request of an investor who holds two stocks A & B, an analyst prepared ex ante probability distribution for the possible economic scenarios and the conditional returns for two stocks and the market index as shown below. Economic Scenario Growth Stagnation Recession Probability 0.40 0.30 0.30 Conditional Returns (%) A B Market 25 20 18 10 15 13 -5 -8 -3

Risk free rate during the next year is expected to be around 11 %. Determine whether the investor should liquidate his holdings in stocks A & B or on the contrary make fresh investments in them? The assumptions of CAPM hold true. Q. 4 The data given below relates to companies Alpha and Beta. Expected Dividend Current market price Expected market price after 1 year under 2 scenarios Optimistic scenario 100 Pessimistic scenario 50 Alpha (Rs.) 5 60 Beta (Rs.) 8 120

175 100

If an investors holding period is one year, which stock should he buy?

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