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QUESTION
The Stock of Max Ltd performs relatively well compared to other stocks during recessionary periods. The stock of Bax Ltd, on the other hand, does well during growth periods. Both the stocks are currently selling for Rs 100 per share. You assess the rupee wealth (dividend plus price) of owning these stocks for the next year as follows:
Economic Condition
High Growth
Low Growth
Stagnation
Recession
Probability
0.3
0.4
0.2
0.1
Return on Max's Stock
100
110
120
140
Return on Bax's Stock
150
130
90
60
Required: -
Calculate the Expected Return and Risk from the industry when investing:
I. Rs 1,000 in the equity stock of Max Ltd
II. Rs 1,000 in the equity stock of Bax Ltd
III. Rs 500 each in the equity stock of Max and Bax Ltd.
IV. Explain the importance of the risk-return relationship
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