Portfolio Risk and buying the stock of MSLPC(Price:Rs.

393) which
Mr. Gupta has readily accepted as he was
familiar with the high standards of operations of
Return his former employer.
You have collected further data for the market
Mr. Ajay Gupta recently retired after a stint of
and MSLPC.
fifteen years in a Digitech Solutions, a software
products and services company. He had joined Period 1 2 3 4 5 6
MSLPC, the state utilities company straight out of % Return 10 8 12 (7) (4) 11
college. However during the period when the Table2. Market Returns
Y2K ‘opportunity’ was making the news in
software services in India, he felt the need for a Period 1 2 3 4 5 6
career change. Despite being on the wrong side % Return 8 5 9 20 16 6
of forty, with his hard work and passion to learn, Table3. MSLPC Share Price Returns
he went on to become a senior vice president at
Digitech Solutions. Your research department has coverage on both
Digitech Services and MSLPC and they have
He has approached your firm for investment given the following forecast. You also find out
advice with very clear objective in his mind. After from the research database that the beta for
settling all the liabilities from his retirement Digitech Solutions is 1.65
benefits and setting aside some amount in liquid
Prob Tbill Digitech MSLPC Market
funds for his expenses, he is left with a surplus
Recession 0.25 7% 9% 15% (2)%
amount of Rs. 60 lakh which he wishes to invest in
the equity market. He is not interested in any Normal 0.60 7% 16% 10% 14%
stock recommendations from your firm. Boom 0.15 7% 20% 7% 18%
Table4. Research Department Expected Returns
Mr. Gupta is risk averse by nature and has
avoided investing in equities till date. While the You have just received a call from Mr. Gupta
time he was with Digitech Solutions, he has seen who insisted that the risk to his portfolio return
the meteoric rise of the company which has been should be as low as possible and the return
reflected in its share price. As an employee he should be at least 12%, otherwise he will drop
had legal restrictions over investing in Digitech the idea of investing in equity and go back to
Solutions, but now that he has retired, he has fixed deposits instead. He added that he has
made up his mind to buy the Digitech Solutions made some calculations and arrived at an 80%
stock(Price: Rs1021). He has looked at the returns allocation for Digitech Solutions and the residual
over the last 6 years and feels that the recent 20% in MSLPC stock. He is meeting you
16% return after two years of negative returns is tomorrow. Before that you need to come up with
the best time to buy the stock. a report suggesting the best plan of action.
Period 1 2 3 4 5 6 Discussion Points
% Return 18 16 12 (11) (6) 16
A. Analyse the two stock portfolio for
Table1. Digitech Solutions Share Price Returns expected returns and risk
B. Comment on the allocation suggested by
He has heard about diversification and knows
Mr. Gupta and suggest an appropriate
that he shouldn’t be putting all the eggs in one
portfolio in terms of number of shares he
basket. Still he is not very keen in forming a
needs to buy of both the companies.
large equity portfolio and has reluctantly
C. Are the two stocks worth buying?
agreed to invest in one more stock. In light of this,
Comment using CAPM.
you have suggested that he should consider