Your friend has a stock portfolio that they know nothing about (it was a gift). They know...

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Finance

Your friend has a stock portfolio that they know nothing about(it was a gift).  They know that you have been taking afinance course at GCC and they assume that you are an expert whenit comes to financial matters.  Your friend is thinkingabout selling one stock and they have asked for your opinion: Ifall things remain equal, which stock would you sell and which stockwould you definitely keep.
There are four stocks in the portfolio:

You have recently read an article in the Globe and Mail denotingthat the likelihood of a market expansion next year is 30%, whilethe likelihood of a market decline is only 10%.  Youtrust the journalist and you assume that the probability of anormal market would be the remaining 60%.  Based on thisarticle and some research, you conclude the expected performance ofeach stock will be:

You also find the Beta for each stock: Charlie’s = 1.5; Shiloh =1; Taiya = 0.7; Zoe = 0.5.  In addition, a GIC has a rateof 3% and the market risk premium is 10%.
Assume that the portfolio is properlydiversified.  Also assume that you like your friend andyou want to give them the best information possible.
Required:  To fully answer yourfriend’s question you will need to comment on:
What is the expected return of EACH stock and theportfolio?
What is the total risk for each stock – showing the values forboth systematic and unsystematic risk and commenting on which riskcan be eliminated?
Based on 1 & 2, which stock would you suggest should besold and which stock should be kept – assume that any selectionthat you make will not affect the diversification of theportfolio.

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3.6 Ratings (338 Votes)

Ans Part A Er Charlie Rf bRm Rf Where Rf GCC risk free rate B beta of the stock Rm Rf market premium Therefore by equation 3 1510 315 18 Er shiloh Rf bRm Rf 31 10 13 ErTaiya Rf bRm Rf 3 0710 10 ErZoe Rf bRm Rf 3 0510 8 Part B In this we assume the See Answer

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Transcribed Image Text

Your friend has a stock portfolio that they know nothing about(it was a gift). They know that you have been taking afinance course at GCC and they assume that you are an expert whenit comes to financial matters. Your friend is thinkingabout selling one stock and they have asked for your opinion: Ifall things remain equal, which stock would you sell and which stockwould you definitely keep.There are four stocks in the portfolio: You have recently read an article in the Globe and Mail denotingthat the likelihood of a market expansion next year is 30%, whilethe likelihood of a market decline is only 10%. Youtrust the journalist and you assume that the probability of anormal market would be the remaining 60%. Based on thisarticle and some research, you conclude the expected performance ofeach stock will be: You also find the Beta for each stock: Charlie’s = 1.5; Shiloh =1; Taiya = 0.7; Zoe = 0.5. In addition, a GIC has a rateof 3% and the market risk premium is 10%.Assume that the portfolio is properlydiversified. Also assume that you like your friend andyou want to give them the best information possible.Required: To fully answer yourfriend’s question you will need to comment on:What is the expected return of EACH stock and theportfolio?What is the total risk for each stock – showing the values forboth systematic and unsystematic risk and commenting on which riskcan be eliminated?Based on 1 & 2, which stock would you suggest should besold and which stock should be kept – assume that any selectionthat you make will not affect the diversification of theportfolio.