Risk and Return, Stock A has been paying annual dividend of $8.56 p.a. in last few years and is expected to keep the same dividend in the foreseeable future

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Hi there, looking for some help with answering the following questions ASAP. Need calculations/equations to be typed out in Word using the equation function. Thanks!

You are the portfolio manager for a managed fund company. Currently you have limited funds
available. Opportunity cost of your fund is 12%. There are three stocks (A, B and C) available in the
market, you however need only one more stock to complete your portfolio. Few of the key features
of the three stocks are as follows:

Stock A has been paying annual dividend of $8.56 p.a. in last few years and is expected to keep the
same dividend in the foreseeable future;

Stock B has paid $6.23 annual dividend in the current year and is expected to grow at a constant rate
of 4% p.a. in the foreseeable future;

Stock C has paid $6 annual dividend in the current year and is expected to grow at 9% p.a. for the first
five years and remain constant thereafter.

(i) You have approached a broker to buy a share. He is offering all the shares (A, B and C) at the
same price of $80 each. Explain your stock selection with relevant calculations.

As part of your job you have a portfolio comprising $325,000 investment in Stock D and $175,000
investment in Stock E, the correlation coefficient between stock D and E is 0.15.

Stock D

Stock E

Expected return [E(R)]

14%

18%

Standard Deviation

16%

24%

(ii) Rank stock D and E in terms of their return risk and return performance

(iii) How does combining stock D and E in a portfolio impact the risk?

(iv) How much the portfolio risk changes if the correlation between the securities changed to -0.89
and +0.95. Calculate, Compare and comment on the portfolio risk under 3 different correlation
values (i.e. 0.15, -0.89 and +0.95) and its implication on risk diversifications.

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