Question 1 [1+2+2+5=10 marks] You are an investor who has currently has a $750,000 portfolio consisting...

 

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Question 1 [1+2+2+5=10 marks] You are an investor who has currently has a $750,000 portfolio consisting entirely of an investment in the shares of Company A Ltd. You are considering selling some of your existing portfolio and investing those proceeds into the shares of Company B Ltd. Following that transaction, the total value of your investment in shares in Company A will be twice that of your investment in Company B. You estimate that the correlation coefficient between the returns of the shares of company A and the shares of company B is 0.70. Details of the returns and variability of those returns are as follows: Asset Expected Return Standard deviation of Shares of company A Shares of company B a) What is the value of your investment in the shares of Company A and Company B immediately after the transaction? What weights do these represent in your portfolio? b) What is the expected return of your portfolio following the purchase of shares in Company B? [express as a percentage with the final answer correctly rounded to two decimal places - e.g. 50.67% p.a.) c) What is the standard deviation of the returns from your portfolio following the purchase of shares in Company B? [express as a percentage with the final answer correctly rounded to two decimal places-e.g. 50.67% p.a.) Asset d) At dinner that night you tell your friend who is doing a marketing major about your wheelin' n' dealin'. Your friend says "Yeah that's pretty cool, but it's a shame you didn't diversify away any risk while you were at it. You've actually taken on additional risk!". In no more than 8 lines reply to your friend clearly stating whether you agree or disagree with their statements. 0.15 0.20 Question 2 12 +2 +3 = 7 marks] Consider the following information relating to the following three assets: Asset C, the 10 year government bond rate (which can be used as a proxy for the risk-free rate of return) and the ASX 200 index (which can be used as a proxy for the market portfolio). Asset C 10-year gov't bond ASX200 Index Standard deviation of returns (p.a.) 0.35 0 0.15 returns 0.25 0.40 Expected return (p.a.) ? 0.03 0.10 Correlation with Asset C 1.00 0 0.65 Correlation with 10-year bonds 1.00 0 Correlation with ASX200 1.00 (a) What is the beta of Asset C? (to 2 decimal places) (b) According to the CAPM what is the expected return of Asset C? (express as a percentage figure to 2 decimal places e.g. 50.04%) (c) According to the CAPM what is the beta and expected return of a portfolio consisting of a 50% investment in Asset C and a 50% investment in a diversified portfolio that replicates the ASX200? (express your answers as in (a) and (b)) • Due to a bug in the system, you will see the question appears three times in the rubric. Please select the same mark for all of them when you complete the self-assessment and peer review. Question 1 [1+2+2+5=10 marks] You are an investor who has currently has a $750,000 portfolio consisting entirely of an investment in the shares of Company A Ltd. You are considering selling some of your existing portfolio and investing those proceeds into the shares of Company B Ltd. Following that transaction, the total value of your investment in shares in Company A will be twice that of your investment in Company B. You estimate that the correlation coefficient between the returns of the shares of company A and the shares of company B is 0.70. Details of the returns and variability of those returns are as follows: Asset Expected Return Standard deviation of Shares of company A Shares of company B a) What is the value of your investment in the shares of Company A and Company B immediately after the transaction? What weights do these represent in your portfolio? b) What is the expected return of your portfolio following the purchase of shares in Company B? [express as a percentage with the final answer correctly rounded to two decimal places - e.g. 50.67% p.a.) c) What is the standard deviation of the returns from your portfolio following the purchase of shares in Company B? [express as a percentage with the final answer correctly rounded to two decimal places-e.g. 50.67% p.a.) Asset d) At dinner that night you tell your friend who is doing a marketing major about your wheelin' n' dealin'. Your friend says "Yeah that's pretty cool, but it's a shame you didn't diversify away any risk while you were at it. You've actually taken on additional risk!". In no more than 8 lines reply to your friend clearly stating whether you agree or disagree with their statements. 0.15 0.20 Question 2 12 +2 +3 = 7 marks] Consider the following information relating to the following three assets: Asset C, the 10 year government bond rate (which can be used as a proxy for the risk-free rate of return) and the ASX 200 index (which can be used as a proxy for the market portfolio). Asset C 10-year gov't bond ASX200 Index Standard deviation of returns (p.a.) 0.35 0 0.15 returns 0.25 0.40 Expected return (p.a.) ? 0.03 0.10 Correlation with Asset C 1.00 0 0.65 Correlation with 10-year bonds 1.00 0 Correlation with ASX200 1.00 (a) What is the beta of Asset C? (to 2 decimal places) (b) According to the CAPM what is the expected return of Asset C? (express as a percentage figure to 2 decimal places e.g. 50.04%) (c) According to the CAPM what is the beta and expected return of a portfolio consisting of a 50% investment in Asset C and a 50% investment in a diversified portfolio that replicates the ASX200? (express your answers as in (a) and (b)) • Due to a bug in the system, you will see the question appears three times in the rubric. Please select the same mark for all of them when you complete the self-assessment and peer review.

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ANSWER a What is the value of your investment in the shares of Company A and Company B immediately after the transaction What weights do these represent in your portfolio 600000 in Company A shares an... View the full answer