PFM3063 - Advanced Financial Management Quiz 2 and 3 (Dec 2023)
PFM3063 - Advanced Financial Management Quiz 2 and 3 (Dec 2023)
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PFM3063 – Advanced Financial Management
Quiz 2 and 3
QUESTION 1
Given the probability of possible returns for two stocks as follows:
State of economy Probability Stock A (%) Stock B (%)
Boom 0.2 41.0 32.0
Normal 0.6 6.0 10.0
Recession 0.2 (5.0) 0
a) Find the expected return and standard deviation for each share.
(10 marks)
b) Calculate the covariance and correlation between the two shares.
(6 marks)
c) Calculate the expected return and standard deviation of a portfolio consisting of
48,000 shares A, currently selling at RM5.00 each, and 100,000 shares B currently
selling at RM3.60 each.
(8 marks)
QUESTION 2
The following information are available to you as a portfolio manager.
Stock Estimated Return Standard Correlation with
(percent) Deviation market
(percent)
Avery 6.40 19.0 0.16
Bravery 4.10 10.0 0.55
Cheery 5.20 6.0 0.88
Deary 3.70 4.2 1.03
You expect a Treasury Bill rate of 1.9 percent, an FBMKLCI return and standard
deviation of 4.5 percent and 6 percent, respectively. By using SML:
a) calculate the expected return for each stock and identify the relationship of the
respective expected returns and SML
(8 marks)
b) determine which stock is undervalued, overvalued, and fairly valued and
possible actions can be taken for the respective stocks
(5 marks)
c) based on your answer above, sketch and plot the SML.
(3 marks)
END OF QUESTIONS
