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Four stocks which have the following characteristics are used to construct a portfolio: ...

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Accounting

Four stocks which have the following characteristics are used to construct a portfolio:

STOCK Number of shares Market prices Expected return Standard deviation Beta
hsbc 100 70 5% 4% 1.10
CLP 100 60 5% 4% 0.80
SINOPEC 1000 7 6% 5% 1.30
CHINA MOB 100 80 6% 5% 1.05

In addition, ten-year Hong Kong Exchange Fund Notes currently yield 1% annually.

The Hang Seng Index generates the market return of 5% annually.

Required

a. Based on the above information, evaluate which of the stocks HSBC, CLP, SINOPEC and China Mobile (if any) is appealing to investors. (12 marks)

b. If the four stocks are included in a portfolio as described in the above table, determine the beta and expected return for this portfolio. (12 marks)

c. Analyse how much SINOPEC stock one must sell and reinvest in CLP so that the beta of the portfolio can change to 1.00. (6 marks)

d. If the returns of the four stocks are presumed to follow a normal distribution, discuss the probability that each of them is undervalued or overvalued. (20 marks)

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