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(solution) You are a portfolio manager who invests in Australian equities.


  • You are a portfolio manager who invests in Australian equities. Being a successful manager you have been approached by Mrs. Adeline, a high new wealth individual who has an interest in investing into your fund. She is curious with the management of risk you utilise, and is particularly interested with the effects of diversification.
  • (A) Provide a brief discussion of approximately 300 words for Mrs. Adeline detailing the risks inherent in stock returns and the effects of diversification.
  • (6 marks)
  • Part of your job is to identify stocks for placement into the portfolio. You wish to evaluate the characteristics of Bryson and Sons, a publicly listed Australian company. Over the coming year the firms economists estimate the probability of a number of different economic situations and the expected return of the economy in each situation. As Bryson and Sons is closely integrated with the Australian economy the rates of return for the economy can be used for Bryson and Sons.
  • The probability for economic situation is listed in the below table:

Probability

Return

Boom

10%

25%

Growth

30%

12%

Stagnant

40%

5%

Recession

20%

-17%

  • (B) Identify the expected return and standard deviation of Bryson and Sons.

                                                                                                (5 marks)

  • (C) Treasury bills currently pay a return of 5%. On the basis of the individual returns and standard deviations of Bryson and Sons and the T-bill would you recommend the purchase of Bryson and Sons? Why or why not?
  • (2 marks)

 


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