Q1.

Consider the following information:

State of Probability of Rate of return

Security x Security y
economy the state
1 0.2 0% -10%
2 0.3 10% 10%
3 0.2 20% 40%
4 0.1 12% 20%
5 0.2 25% 10%

Case 1. Assume, Mamusha Fikadu is considering buying stocks for the first time and is
looking for a single Security in which he'll make a major investment.

Required:

A. What is the expected return of each security?

B. What is the standard deviation of each security?
C. What is the coefficient of variation for each security?
D. Based on risk and return nature of the investment, which security is best investment
alternative?

Case 2. Assume, Mamusha Fikadu is considering to invest birr 200,000 in security x and the
remaining 600,000 in security Y.

Required:

A. What is the expected return of the portfolio

B. What is the correlation coefficient between the two assets
C. What is the standard deviation of the portfolio

State of economy Probability Market return ABC return

God 0.1 20% 25%
Average 0.3 10% 30%
Bad 0.4 5% 40%
Worse 0.2 -10% 15%
2. Use the following data to answer question given below

1
Required

A. Compute the expected return of ABC security

B. Compute the standard deviation of ABC security
C. Compute the expected return of the market
D. Compute the standard deviation of the market
E. Compute the covariance between the market and the security
F. Compute the systematic risk or beta of the security

3. Use the following data to answer question given below

Security Amount invested Expected return Beta

A $2000 10% .1
B 4,000 20% 1.5
C 3,000 15% 1.25
D 1,000 6% 0.25

Required:

A. Compute the expected return of the portfolio

B. Compute beta of the portfolio

4. Briefly discuss at least five types of short term financial investment vehicles
5. Prepare short note about the three major types of long term investment vehicles
6. Discuss the difference between investment in financial asset and real asset