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Problem - A company with $5,000,000, excess funds, would like to invest it in shares. The Finance Officer has identified five stocks (A, B, C, D & E} that promise a good return. From the consultations made, the Finance Officer has found that stock A is twice as important as E, and therefore, it should be allocated 20% of the funds, but C and D, which are equally important. The consultations further revealed that stock A with a return of 15% has a beta of 0.8 and Stock B with a return of 20% has a beta of 1.1; stock C with a return of 9% has a beta of 0.5; stock D with a return of 12% has a beta of 0.7, and stock E with a return of 18% has a beta of 1.2.
Required -
a) How much money should the company invest in each stock?
b) Explain the meaning and importance of beta to a non-financial person?
c) Find the Portfolio Beta and explain its implication?
d) What is the expected return on this investment?
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