MBA 4007 E (F3)MBA DEGREE EXAMINATION, JUNE, 2014Fourth Semester PORTFOLIO MANAGEMENTMax Marks: 60Scheme of Evaluation and Solutions________________________________________________________________________PART A5 X 2 10MAnser !n" FIVE #uest$ons %rom the %o&&o$n'(!) Portfolio Risk*ort%o&$o r$s+ re%ers to the ,oss$-$&$t" th!t !n $n.estment ,ort%o&$o $&& not e!rn thee/,e0te1or 1es$re1r!teo% return) In.estors !ttem,t tore1u0eth$s r$s+throu'h1$.ers$%$0!t$on or he1'$n' 2t!+$n' !n o%%sett$n' ,os$t$on $n ! re&!te1 se0ur$t"3)-) Motives for investmentThe $n.estor h!s to set out h$s ,r$or$t$es +ee,$n' the %o&&o$n' mot$.es $n m$n1) A&& $n.estors ou&1 &$+e to h!.e 4!,$t!& !,,re0$!t$on, In0ome, 5$#u$1$t" or M!r+et!-$&$t",S!%et" or Se0ur$t" !n1 6e1'e !'!$nst $n%&!t$on)0) Risk Free AssetAn !sset hose %uture return $s +non $th 0ert!$nt") 6oe.er, e.en these !ssets !re su-7e0t to $n%&!t$on r$s+) 8h$0h 1enote1 -" R% )1) Optimal Portfolio*ort%o&$o $n h$0h the r$s+9re!r1 0om-$n!t$on $s su0h th!t $t "$e&1s the m!/$mumreturns 2,ro.$1es the h$'hest ut$&$t"3 ,oss$-&e un1er the 0urrent !n1 !nt$0$,!te10$r0umst!n0es) Its m!them!t$0!& %ormu&!t$on !s ,ro.$1e1 the Un$.ers$t" o%4!&$%orn$!:s no-&e &!ure!te e0onom$st 6!rr" M!r+o$t; 2-orn 1B2st!t$st$0!&&", th$s h!,,ens $th ! CDB &$+e&$hoo13)Beta ratios: Bet! r!t$os !re use1 to me!sure the r$s+ o% !n $n.estment re&!t$.e tothe r$s+ o% ! 0om,!r!-&e m!r+et -en0hm!r+) I% e &oo+ !t the 4!n!1$!n E#u$t" Fun1s, theM!0+en;$e I." 4!n!1$!n Fun1 h!s one o% the &oest Bet!s !t 0)AC) On the other en1 o%thes,e0trum, theM!.r$/Groth%un1h!s theh$'hest -et!!t 2)00) 8h!t 1othesenum-ers me!nE I% ! %un1 h!s ! -et! o% 1)0, $t $s s!$1 to h!.e the s!me r$s+ !s the m!r+et)Thus, the M!.r$/ Groth Fun1 $th ! -et! o% 2)0 $s s!$1 to h!.e t$0e the r$s+ o% them!r+et) The M!0+en;$e I." 4!n!1$!n, $th ! -et! o% 0)AC $s s!$1 to h!.e one9th$r1 ther$s+ o% the m!r+et) Bet!s !re o%ten use1 $n the $n1ustr" !s ! re&!t$.e -en0hm!r+ %or r$s+!n!&"s$s)3Chance of loss:4h!n0e o% &oss me!sures ho o%ten ! %un1 &oses mone" .ersusm!+es mone") U&tr!90onser.!t$.e $n.estments m!+e mone" 100B o% the t$me !n1 ne.er&ose) At the other e/treme, some F!r E!st %un1s &ose mone" !s mu0h !s C0B o% the t$me!n1 m!+e mone" on&" 40B o% the t$me) The more o%ten ! %un1 &oses mone", the 're!terthe ,!t$en0e re#u$re1 -" the $n.estor)Volatility:Th$s $s themost tr!1$t$on!& me!sureo% r$s+) 8henm!r+ets mo.e$&1&", ouremot$onsm!"t!+e0ontro& !n1%or0eus$nto,oor1e0$s$ons!t theorst,oss$-&et$me) B"%o0us$n'on.o&!t$&$t"!s!me!sureo%r$s+, e0!n!00ount %orthe&$+e&$hoo1 th!t ,oor 1e0$s$ons $&& short90$r0u$t our $n.estment str!te'")Value at Risk (VaR)( Th$s $s one o% the more $1e&" use1 "et m$sun1erstoo1 r$s+me!surements) F!R0!n-e0!&0u&!te1$nm!n"1$%%erent !"s, -ut $ts$ntent$on$stome!sure the &$+e&$hoo1 th!t %uture ,ort%o&$o &osses $&& rem!$n $th$n ! 0ert!$n r!n'e) Fore/!m,&e, $% ! ,ort%o&$o h!s ! one91!" 2B F!R o% G10,000, there $s ! 2B ,ro-!-$&$t" th!tthe ,ort%o&$o $&& 1e0&$ne -" more th!n G10,000 $n ! '$.en 1!") Th$s me!ns e shou&1e/,e0t to see ! 1e0&$ne 're!ter th!n G10,000 no more th!n on0e e.er" >0 1!"s) The m!$n,ro-&em $th F!R $s ho $t h!s -een 0!&0u&!te1 !n1 !,,&$e1) F!R $s -!se1 on ! norm!&1$str$-ut$on o% return) S$n0e sto0+ ,r$0es o%ten h!.e %!t9t!$&s, th$s ,rem$se %!$&s !n1 eo%ten see e/treme resu&ts more %re#uent&" th!n the mo1e& ,re1$0ts) More $m,ort!nt&", themo1e& 1oes not o%%er us ! m!/$mum &oss, -ut on&" ! r!n'e $n h$0h returns shou&1 %!$&) I%I h!1 ! G100,000 ,ort%o&$o !n1 ! ,er%e0t F!R mo1e& th!t !00ur!te&" ,re1$0te1 I ou&1on&"&oseG>,000one1!"e.er""e!r, Iou&1-e&$e.emer$s+!&&o0!t$on!s,er%e0t)6oe.er,$%onth!t one1!",I&ost GA0,000m"r$s+$smu0htooh$'h) B"%!$&$n'to0!,ture the m!/$mum ,otent$!& &oss, F!R h!s m!7or &$m$t!t$ons)(or)2.a. What is International diversification and explain the reasons for International diversification? 5MDefinition of International diversification 2MReasons for International diversification 3MInternational DiversificationThe !ttem,t to re1u0e r$s+ -" $n.est$n' $n more th!n one n!t$on) B" 1$.ers$%"$n'!0ross n!t$ons hose e0onom$0 0"0&es !re not ,er%e0t&" 0orre&!te1, $n.estors 0!n t",$0!&&"re1u0e the .!r$!-$&$t" o% the$r returns)Reasons for International diversification4M!n"$n.estors !n1-us$nesses st!rt o%% 1omest$0!&&", $n.est$n'mone"or 1o$n'-us$ness$nthe!re!herethe"&$.e)There!rem!n"!1.!nt!'estoth$s, su0h!snoth!.$n' to orr" !-out ho %ore$'n ent$t$es !re re'!r1e1 -" n!t$on!&s, !n1 $t 0!n -e e!s$erto !t0h o.er the -us$ness or $n.estment) At the s!me t$me, $n.est$n' or 1o$n' -us$nesson&"$nthe1omest$0!re!0!n&e!1tor$s+s, -e0!usethere$snoheretoturn$% the1omest$0 %$n!n0$!& s$tu!t$on 'oes 1on!r1) Th$s &e!1s m!n" ,eo,&e to use $ntern!t$on!&1$.ers$%$0!t$on !s ! r$s+ m!n!'ement te0hn$#ue) In.estors !n1 -us$nesses -oth use $ntern!t$on!& 1$.ers$%$0!t$on, -ut the !" the" use $t$s 1$%%erent) An $n.estor see+s out 0om,!n$es th!t !re 1o$n' e&& $n ! ,!rt$0u&!r !re! or !ree/,er$en0$n' $n0re!se1 0urren0" stren'th) A%ter %$n1$n' ,ro,er !re!s $n h$0h to $n.est,the$n.estor$&& -u"sto0+s%romthe$ntern!t$on!& 0om,!n$es) Bus$nesses$&& e/ten1themse&.es to other !re!s e$ther -" -u$&1$n' $ntern!t$on!& o%%$0es or -" e/,ort$n')Bu$&1$n' o%%$0es o%ten t!+es more t$me !n1 or+ -ut m!" he&, m!+e ! -etter ,ro%$t, h$&ee/,ort$n' ten1s to -e more .ers!t$&e !n1 e!s$er to st!rt)D$.ers$%$0!t$on1oes,ro.$1e-ene%$tsto&on'9term$n.estors) It ,rote0ts,ort%o&$os!'!$nst the ne'!t$.e e%%e0ts o% ho&1$n' 0on0entr!te1 ,os$t$ons $n 0ountr$es $th ,oor &on'9term e0onom$0 ,er%orm!n0e) 8h$&e $ntern!t$on!& 1$.ers$%$0!t$on m$'ht not ,rote0t %romHterr$-&e 1!"s, months, or e.en "e!rs,I o.er &on'er ,er$o1s o% t$me, $t shou&1 ,ro1u0e !h$'her r$s+9!17uste1 return .ersus ho&1$n' ! ,ort%o&$o o% !ssets %rom ! s$n'&e 0ountr") Formost $n.estors, !&on'er,er$o1o%t$meshou&1-etheon&"t$mehor$;onthe"shou&10ons$1er)b. Briefly discuss about advantages of diversification. 3MThere $s ! re1u0e1 0h!n0e th!t !&& $n.estments $th$n ! 1$.ers$%$e1 ,ort%o&$o $&& ,er%orme#u!&&" !s ,oor&" $th$n !n" '$.en ,er$o1)JB" $n.est$n' $n ! &!r'er r!n'e o% $n.estments,"ou m!" '!$n e/,osure to $n.estmentsen7o"$n' ! stron' r!te o% return h$0h "ou m!" not h!.e other$se -een e/,ose1 to)5D$.ers$%$0!t$on $s the !0t o% ho&1$n' ! num-er o% 1$%%erent $n.estments s$mu&t!neous&" !n1$sthemost 0ommonte0hn$#ueuse1tom$n$m$;e$n.estment r$s+, !sthe.o&!t$&$t"o%1$%%erent $n1$.$1u!& $n.estments o%%set one !nother to the e/tent th!t the" 1o not mo.e $nthe s!me 1$re0t$on !n1 -" the e/!0t s!me !mount,!t the s!me t$me)Th$s re1u0es theo.er!&& .o&!t$&$t" o% the ent$re $n.estment ,ort%o&$o)Risk Reduction8hen our !ssets !re $1e&" 1$.ers$%$e1, our ,ort%o&$o ten1s to ,er%orm $n ! s$m$&!r!" to the m!r+et !s ! ho&e) I% e on sto0+s $n 20 1$%%erent !re!s !n1 one o% themt!+es ! 1$.e, $t:s un&$+e&" th!t our ,ort%o&$o $&& su%%er terr$-&") D$.ers$%$0!t$on $s the -est!" to $n0re!se the st!-$&$t" o% our $n.estments !n1 1e0re!se our r$s+ o% &os$n' mone" $nthe e.ent th!t ! s$n'&e !re! 1e0re!ses $n .!&ue) A&thou'h 1$.ers$%$0!t$on on:t ,rote0t us%rom 'ener!& m!r+et s&o1ons, $t $&& m!$nt!$n our ,ort%o&$o:s st!-$&$t" o.er t$me) Asset Choices8hen our ho&1$n's !re $1e&" 1$.ers$%$e1, e 0!n s,re!1 them out o.er $1e&"1$.er'ent%orms o% !ssets,$n0&u1$n' se0ur$t$es su0h !s sto0+s !n1 -on1s,0ommo1$t$essu0h!so$& !n1m$ner!&s, re!& est!te!n10!sh) E!0ho%these!ssetse/h$-$ts1$%%erentstren'ths !n1 e!+nesses $n terms o% r$s+ !n1 ,ro%$t!-$&$t") M!$nt!$n$n' ho&1$n's $n !&& o%these !re!s he&,s to 0re!te ! st!-&e ,ort%o&$o th!t $&& $n0re!se $n .!&ue o.er the &on' term)Lower MaintenanceIn.estments re#u$re ! 0ert!$n !mount o% 0!re !n1 !ttent$on to +ee, them,er%orm$n' e&&) I% e !re ,&!"$n' h$'h9st!+es '!mes $th our !ssets !n1 mo.$n' them!roun1throu'hr$s+".entures, e$&& ,ro-!-&"-es,en1$n'!%!$r !mount o% t$me!t0h$n' the m!r+ets !n1 1o1'$n' %$n!n0$!& -u&&ets) A 1$.ers$%$e1 ,ort%o&$o $s &ess e/0$t$n'!n1 more st!-&e) On0e e h!.e our $n.estments sett&e1 $nto ! $1e .!r$et" o% sto0+s !n1se0ur$t$es, the" 0!n rem!$n there %or e/ten1e1 ,er$o1s $thout re#u$r$n' ! &ot o%m!$nten!n0e) Th$s %rees u, our t$me to ,ursue other m!tters !n1 re1u0es the m!r+et stressth!t m!" &e!1 to -urnout)6UNIT II3. Explain how the efficient Frontier is determined using the Markowitz approach? 8MDefinition of Efficient Frontier 2MExplanation of Efficient Frontier using the Markowitz approach 6MEfficient FrontierA set o% o,t$m!& ,ort%o&$os th!t o%%ers the h$'hest e/,e0te1 return %or ! 1e%$ne1 &e.e& o%r$s+ or the &oest r$s+ %or ! '$.en &e.e& o% e/,e0te1 return) *ort%o&$os th!t &$e -e&o thee%%$0$ent %ront$er !re su-9o,t$m!&, -e0!use the" 1o not ,ro.$1e enou'h return %or the &e.e&o% r$s+) *ort%o&$os th!t 0&uster to the r$'ht o% the e%%$0$ent %ront$er !re !&so su-9o,t$m!&,-e0!use the" h!.e ! h$'her &e.e& o% r$s+ %or the 1e%$ne1 r!te o% return)In or1er to 0om,!re $n.estment o,t$ons, M!r+o$t; 1e.e&o,e1 ! s"stem to 1es0r$-e e!0h$n.estment ore!0h!sset 0&!ss$thm!th, us$n'uns"stem!t$0r$s+st!t$st$0s) Thenhe%urther !,,&$e1 th!t to the ,ort%o&$os th!t 0ont!$n the $n.estment o,t$ons) 6e &oo+e1 !t thee/,e0te1r!te9o%9return!n1thee/,e0te1.o&!t$&$t"%ore!0h$n.estment) 6en!me1h$sr$s+9re!r1 e#u!t$on The Efficient Frontier) The 'r!,h -e&o $s !n e/!m,&e o% h!t theE%%$0$ent Front$er e#u!t$on &oo+s &$+e hen ,&otte1) The ,ur,ose o% The E%%$0$ent Front$er$s to m!/$m$;e returns h$&e m$n$m$;$n' .o&!t$&$t")7*ort%o&$os!&on'TheE%%$0$ent Front$ershou&1h!.eh$'herreturnsth!n$st",$0!&, on!.er!'e, %or the &e.e& o% r$s+ the ,ort%o&$o !ssumes) Not$0e th!t The E%%$0$ent Front$er &$ne st!rts $th &oer e/,e0te1 r$s+s !n1 returns, !n1 $tmo.esu,!r1 toh$'her e/,e0te1r$s+s !n1returns)So,eo,&e $th1$%%erentIn.estor*ro%$&es 21eterm$ne1 -" $n.estment t$me hor$;on, to&er!n0e %or r$s+ !n1 ,erson!&,re%eren0es3 0!n%$n1!n!,,ro,r$!te,ort%o&$o!n"here!&on'TheE%%$0$ent Front$er&$ne) The E%%$0$entFront$er%&!ttens !s$t'oes h$'her -e0!usethere$s ! &$m$tto the returns$n.estors 0!n e/,e0t)(or)84. Explain the Single Index Model proposed by William Sharpe. 8MTheSh!r,e S$n'&e9In1e/Mo1e& 2SIM3!s 1e.e&o,e1 -" 8$&&$!m Sh!r,e!s!too& %or re1u0$n'the num-er o% $n,uts 2est$m!tes3 nee1e1%or M!r+o$t; ,ort%o&$oo,t$m$;!t$on) The SIM st!rts $th the o-ser.!t$on th!t the returns on most !ssets mo.e $nre&!t$on to the returns on the o.er!&& m!r+et, !s me!sure1 -" the Hm!r+et ,ort%o&$oI 2thereturns on the H!.er!'e !ssetI $n the e0onom"3) In theor", the m!r+et ,ort%o&$o $s ! .!&ue9e$'hte1 ,ort%o&$o 2$n1e/3 o% !&& !ssets $n the e0onom") In ,r!0t$0e, !n" o% se.er!& -ro!19-!se1m!r+et $n1$0es !reuse12e)'), thereturnsontheSK*>003) HF!&ue9e$'hte1Ime!ns th!t the e$'ht '$.en to e!0h !sset@s return $n the ,ort%o&$o $s the %r!0t$on th!t the!sset@s m!r+et .!&ue 2the num-er o% sh!res outst!n1$n' t$mes the ,r$0e ,er sh!re3re,resents o% thetot!& m!r+et .!&ueo% !&& !ssets $nthem!r+et ,ort%o&$o) TheSIMe/,ress$on %or the r!n1om return on !sset i $s(RL! M - Rm Me$8hereR = the r!n1om 2un0ert!$n3 tot!& return on !sset iN!L!&,h!, thenon9r!n1om0om,onent o%!sseti@sreturnth!t $sun$#ue2%$rm9s,e0$%$03 to !sset iN- L -et!, ! me!sure o% the sens$t$.$t" o% !sset i@s return to the return on the m!r+et,ort%o&$oNRm L the r!n1om 2un0ert!$n3 tot!& return on the m!r+et ,ort%o&$oNA&thou'h the !-o.e mo1e& $s #u$te 'ener!& 2s$n0e !&,h!, -et!, or -oth !&,h! !n1-et!0!n-e e#u!&to;eroor !n"othernum-ers3, theSIM1oes re&" onthrees,e0$%$0!ssum,t$ons) 2I%on&"the%$rst too%the%o&&o$n'three!ssum,t$ons!rem!1e, themo1e& $s re%erre1to!s theHm!r+et mo1e&I $nste!1o% !s theHSh!r,eS$n'&e9In1e/Mo1e&)I3 8e no $ntro1u0e the %$rst !ssum,t$on( !&& r!n1om .!r$!-&es h!.e finite me!ns!n1 .!r$!n0es) 2Th$s m!" seem e$r1, -ut there !re some ,ro-!-$&$t" 1$str$-ut$ons th!th!.e $n%$n$te or un1e%$ne1 me!ns !n1?or .!r$!n0esN e !ssume th!t the r!n1om .!r$!-&es$n the !-o.e mo1e& 1o not h!.e su0h ,ro-!-$&$t" 1$str$-ut$ons)3Given the above assumption, it is convenient to have the meanof epsilon equal to zero.n fact, !e normall" e#pect the $isturbance%term to have a mean of zero, since the ran$om error represents the nete&ect of man" in$ivi$ual ran$ome&ects 'outsi$e of the mar(etportfolio) on the asset*s return, an$ on avera+e the" shoul$ cancel out.,ut even if the $isturbance term has a non-zero mean, !e can al!a"sconstruct the above equation so that a mo$i.e$ $isturbance term hasa mean of zero.UNIT III5. Define the Efficient Market Hypothesis in each of its three forms and what are itsimplications? 8MDefinition of Efficient Market Hypothesis 2MExplanation of three forms 6MEfficient Market HypothesisAn$n.estment theor"th!t st!tes$t $s$m,oss$-&etoJ-e!t them!r+etJ-e0!usesto0+ m!r+et e%%$0$en0" 0!uses e/$st$n' sh!re ,r$0es to !&!"s $n0or,or!te !n1 re%&e0t !&&re&e.!nt $n%orm!t$on) A00or1$n' to the EM6, sto0+s !&!"s tr!1e !t the$r %!$r .!&ue onsto0+ e/0h!n'es, m!+$n' $t $m,oss$-&e %or $n.estors to e$ther ,ur0h!se un1er.!&ue1 sto0+sorse&& sto0+s%or$n%&!te1,r$0es)Assu0h, $t shou&1-e$m,oss$-&etoout,er%ormtheo.er!&& m!r+et throu'h e/,ert sto0+ se&e0t$on or m!r+et t$m$n', !n1 th!t the on&" !" !n$n.estor 0!n ,oss$-&" o-t!$n h$'her returns $s -" ,ur0h!s$n' r$s+$er $n.estments)The EM6e/$sts $n .!r$ous 1e'rees( e!+, sem$9stron' !n1 stron', h$0h!11resses the $n0&us$on o% non9,u-&$0 $n%orm!t$on $n m!r+et ,r$0es) Th$s theor" 0onten1sth!t s$n0em!r+ets !ree%%$0$ent !n10urrent ,r$0esre%&e0t !&& $n%orm!t$on, !ttem,ts toout,er%orm the m!r+et !re essent$!&&" ! '!me o% 0h!n0e r!ther th!n one o% s+$&&)The e!+%ormo% EM6!ssumes th!t 0urrent sto0+,r$0es %u&&"re%&e0t !&&0urrent&" !.!$&!-&e se0ur$t" m!r+et $n%orm!t$on) It 0onten1s th!t ,!st ,r$0e !n1 .o&ume1!t! h!.e no re&!t$onsh$, $th the %uture 1$re0t$on o% se0ur$t" ,r$0es) It 0on0&u1es th!te/0ess returns 0!nnot -e !0h$e.e1 us$n' te0hn$0!& !n!&"s$s)The sem$9stron' %orm o% EM6 !ssumes th!t 0urrent sto0+ ,r$0es !17ust r!,$1&" tothe re&e!se o% !&& ne ,u-&$0 $n%orm!t$on) It 0onten1s th!t se0ur$t" ,r$0es h!.e %!0tore1 $n1/!.!$&!-&em!r+et !n1non9m!r+et ,u-&$0$n%orm!t$on) It 0on0&u1esth!t e/0essreturns0!nnot -e !0h$e.e1 us$n' %un1!ment!& !n!&"s$s)The stron' %orm o% EM6 !ssumes th!t 0urrent sto0+ ,r$0es %u&&" re%&e0t !&& ,u-&$0!n1 ,r$.!te $n%orm!t$on) It 0onten1s th!t m!r+et, non9m!r+et !n1 $ns$1e $n%orm!t$on $s !&&%!0tore1 $nto se0ur$t" ,r$0es !n1 th!t no one h!s mono,o&$st$0 !00ess to re&e.!nt$n%orm!t$on) It !ssumes ! ,er%e0t m!r+et !n1 0on0&u1es th!t e/0ess returns !re $m,oss$-&eto !0h$e.e 0ons$stent&") (or)6. a. Describe the Arbitrage Pricing Theory Model of Two Factors. 4MTheAr-$tr!'e*r$0$n'Theor", or A*T, 1es0r$-es !me0h!n$smuse1-"$n.estors to$1ent$%" !n !sset, su0h !s ! sh!re o% 0ommon sto0+, h$0h $s $n0orre0t&" ,r$0e1) In.estors0!n su-se#uent&" -r$n' the ,r$0e o% the se0ur$t" -!0+ $nto !&$'nment $th $ts !0tu!& .!&ue)The Arbitrage Pricing Theory ModelThe A*T mo1e& !s %$rst 1es0r$-e1 -" Ste.en Ross $n !n !rt$0&e ent$t&e1 The Ar-$tr!'eTheor" o% 4!,$t!& Asset *r$0$n', h$0h !,,e!re1 $n the Journ!& o% E0onom$0 Theor" $nDe0em-er 1 0)10D 0)10 11 0)1012 0)A0 14 0)201> 0)14 1C 0)>01D 0)2C 20 0)10Solution: (i) Calculation of the return and standard deviation of the stocks ASTOCK AReturn on stock A Probability4 0)20D 0)1012 0)A01> 0)141D 0)2C1) Return (R):R 24X0)20 M D X0)10 M 12X 0)A0 M 1>X0)14M1DX0)2C3 0)D0M0)D0MA)CM2)1M4)CD 11.981%Return 2R3 o% the sto0+ A 11.982) Standard deviation (SD):SD 24911)0M20X0)103 0)>0M1)10M2)DMD)0M2)00 14.40Return 2R3 o% the sto0+ B 14.402) Standard deviation (SD):SD 2>914)4032X0)10 M 211914)4032X0)10 M 214914)4032X0)20 M 21C914)4032X0)>0M 220914)4032 X0)10 LD)DACM1)1>CM0)0A2M1)2DMA)1AC2/ L14)44 L 3.80St!n1!r1 1e.$!t$on 2SD3 o% the sto0+ B 3.80From the above problem stock A is riskier than stock B. Because stock A standard deviation (4.9157) is higher that stock B (3.80).Note: 2$3 Return 2R3 !n1 St!n1!r1 1e.$!t$on 2SD3 o% sto0+ A L 5Marks2$$3 Return 2R3 !n1 St!n1!r1 1e.$!t$on 2SD3 o% sto0+ B L 5Marks21