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Revision_Tutorial_2009_1 - BUS3026W Finance II 2009...

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BUS3026W Finance II 2009 – Revision Tutorial Due: Not for hand-in _____________________________________________________________ _ Question 1 You have been approached for investment advice by a client. The client has identified a small pool of ‘blue chip’ stocks he wishes to invest in but is uncertain as to what combination of stocks would best suit him and has turned to you for advice. As a first step, you have established an estimate of your client’s tolerance for risk using a standardized questionnaire and found his risk aversion coefficient to be quite high at 6. You have assessed the expected returns and associated risks for each of the shares under consideration as follows: Expected Return Standard Deviation Alpha Investments Ltd. 12.0% 15% Beta Incorporated Ltd. 10.6% 12% Gamma Holdings Ltd. 13.5% 17% Sigma Development Ltd. 8.4% 10% Correlations Alpha Beta Gamma Sigma Alpha 1.00 0.65 0.55 0.70 Beta
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