Returns on Investment

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(CAT 2007)

Shabnam is considering three alternatives to invest her surplus cash for a week. She wishes to guarantee maximum returns on her investment. She has three options, each of which can be utilized fully or partially in conjunction with others.
Option A : Invest in a public sector bank. It promises a return of +0.10%.
Option B : Invest in mutual funds of ABC Ltd. A rise in the stock market will result in a return of + 5% while a fall will entail a return of –3%.
Option C: Invest in mutual funds of CBA Ltd. A rise in the stock market will result in a return of –2.5%, while a fall will entail a return of +2%.

1. The maximum guaranteed return to Shabnam is
a. 0.25%
b. 0.10%
c. 0.20%
d. 0.15%
e. 0.30%

2. What strategy will maximize the guaranteed return to Shabnam?
a. 100% in option A
b. 36% in option B and 64% in option C
c. 64% in option B and 36% in option C
d. 1/3 in each of the three options
e. 30% in option A, 32% in option B and 38% in option C
For answers click here.

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