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SEMESTER SPRING 2012
MGT411 (Money and Banking)
Assignment No. 2
Due Date: June 07, 2012 Marks: 30
Question No. 1 (Marks: 8+8+4 =20)

Topic: Measuring Risk
Learning Objectives:

To enable the students to measure the risk associated with various kinds of investments
so that they can take the right decision while choosing among the various kinds of
investment opportunities.

Learning Outcomes:
Students will be able to take right decision regarding their investment opportunities
after careful analysis of the risk associated with various investment opportunities.

The Case:
Mr. Graduate is planning to make investment in the Karachi Stock Exchange after
graduating from Business University. After a careful analysis of various stocks, he
selected a stock of the company ABC in which he is willing to invest. The current
market price of ABC stock is Rs.200. As this investment is very risky, so he
contacted various experts in the market in order to take their suggestion. Based on
predictions of financial experts, there are following three scenarios relating to his
investment after two months:

1. In case of high growth in the economy, there are 30% chances that the price
of the stock will increase and will be at Rs.350.

2. In case of normal growth in the economy, there are 60% chances that the
price of the stock will remain at Rs.250.

3. In case of recession, there are 10% chances that the prices of the stock will
decrease to Rs.150.

He is unable to further calculate expected value, variance and standard deviation in
order to assess the risk associated with this investment.

Required:
Keeping in view the given scenario, you are required to help Mr. Graduate in
calculating the following:
a. Expected value
b. Variance.
c. Standard deviation.

Question No. 2 (Marks: 10)
Topic: Valuing Stock

Learning Objectives
The objective of this assignment is to enable the students to value a stock in which they
are going to make investment so that they may be able to determine the just price they
should pay for a stock.

Learning Outcomes
Students will be able to determine the just prices of the stocks being traded in the stock
market. They will be able to determine whether a stock in overvalued or undervalued
and can take investment decision accordingly.

The Case:
Assume that you are going to purchase the stock of a company ABC. After careful
analysis you have forecasted that firm's dividends should grow at 8% on average in
the foreseeable future. The last divided the company paid was Rs.4.

Required:
Keeping in view the above data, you are required to compute the current price of the
stock assuming the required return is 18%.

Note:
Only in the case of Assignment, 24 hours extra / grace period after the due date is
usually available to overcome uploading difficulties which may be faced by the students
on last date. This extra time should only be used to meet the emergencies and above
mentioned due dates should always be treated as final to avoid any inconvenience.

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