Probability

Return on Alpha's scrip

0.05
0.2
0.5
0.2
0.05
i)
Expected Rate of return
ii)

0.5 X 12 + 0.5 X 10.3

iii)

0.25 X 12 + 0,75 X 10,3

0.75 X 12 + 0.25 X 10,3

Expected Return Alpha

-2
9
12
15
26

-0.1
1.8
6
3
1.3
12
11.15
10.725
11.575

Return on Beta's scrip

Expected Return Beta

-3
-0.15
6
1.2
11
5.5
14
2.8
19
0.95
10.3

Company
SBI
HDFC
MM
TATA
RELIANCE
WIPRO
TCS

Mean Return
19
23
11
25
13
9
14

Riskfree return Rf
Market return Rm
Market variance
Rank

Beta

Company
1 SBI
2 HDFC
2 MM
4 TATA
5 RELIANCE
5 WIPRO
7 TCS

Z1
Z2
Z3
Z4

Residual Variance
1
1.5
0.5
2
1
0.5
1.5

Ri - Rf
20
30
10
40
20
50
30

14
18
6
20
8
4
9

5
10
10
Ri - Rf / Beta (Ri-Rf)Beta / RV
Cumulative
14
0.7
0.7
12
0.9
1.6
12
0.3
1.9
10
1
2.9
8
0.4
3.3
8
0.04
3.34
6
0.45
3.79

0.659
0.838
0.279
0.917
2.693

0.2445623342
0.3111405836
0.1037135279
0.3405835544

25%
31%
10%
34%

Therefore the optimum portfolio consists of SBI, HDFC, M&M and Tata
An investor should invest 25% in SBI, 31% in HDFC, 10% in M&M, 34% in Tata

Ri - Rf / Beta Rank
14
12
12
10
8
8
6

1
2
2
4
5
5
7

Beta2 / RV
Cumulative Ci
0.05
0.05 0.466667
0.075
0.125 0.711111
0.025
0.15
0.76
0.1
0.25 0.828571 C *
0.05
0.3
0.825
0.005
0.305 0.824691
0.075
0.38 0.789583

Security

Return
1
2
3
4
5
6
7
8

Risk free rate

Market return

Beta
32
30
25
20
18
15
14
12

2.10
1.80
1.65
1.30
1.15
0.85
0.75
0.50

Required RAlpha
50
25.35
6.65
35
22.8
7.2
42
21.525
3.475
26
18.55
1.45
29
17.275
0.725
18
14.725
0.275
20
13.875
0.125
17
11.75
0.25

7.5
16

166
20.75
systematic risk

SD

14.92
1.865
beta 2 X market variance
1.865
625 1165.625 34.14125

Non systematic risk

0.125 0.015625 125.2969 11.19361
Total risk

45.33486

Under or overpriced?
Underpriced
Underpriced
Underpriced
Underpriced
Underpriced
Underpriced
Underpriced
Underpriced

beta

4.41
3.24
2.7225
1.69
1.3225
0.7225
0.5625
0.25
14.92

SD2
2500
1225
1764
676
841
324
400
289
8019