You are an investor with a keen interest in the shares of Handley Ltd and Pinder...

 

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You are an investor with a keen interest in the shares of Handley Ltd and Pinder Ltd. You believe that Handley Ltd is undervalued and Pinder Ltd is overvalued. You have $18,000 of your own money that you plan to invest in Handley Ltd. You also plan on short selling $7,200 of Pinder Ltd shares and investing these additional funds in Handley Ltd shares as well. You estimate that the current yield on a 10-year Government bond is 3% p.a. and plan to use this security as a proxy for the risk-free asset. You also estimate that the market risk premium is 6% p.a. You go on to compile the following information with a view to treating the ASX 200 as a proxy for the market portfolio. Asset Handley Ltd shares Pinder Ltd shares ASX 200 index 10-year Government bond Standard deviation of returns (p.a.) 30% 20% 25% 0 Handley Ltd shares 1.0 0.6 0.8 0 Correlation coefficient (P1,2) Pinder Ltd shares 1.0 0.5 0 ASX 200 1.0 0 10-year Government bond 1.0 8. What is the standard deviation of returns for your portfolio (as a percentage to two decimal places – e.g. 10.03%)? [4 marks] 9. What is the beta of your portfolio (expressed to two decimal places e.g. 0.65)? [6 marks] 10. According to the CAPM, what is the expected return for your portfolio (as a percentage to two decimal places - e.g. 10.03%)? [2 marks] You are an investor with a keen interest in the shares of Handley Ltd and Pinder Ltd. You believe that Handley Ltd is undervalued and Pinder Ltd is overvalued. You have $18,000 of your own money that you plan to invest in Handley Ltd. You also plan on short selling $7,200 of Pinder Ltd shares and investing these additional funds in Handley Ltd shares as well. You estimate that the current yield on a 10-year Government bond is 3% p.a. and plan to use this security as a proxy for the risk-free asset. You also estimate that the market risk premium is 6% p.a. You go on to compile the following information with a view to treating the ASX 200 as a proxy for the market portfolio. Asset Handley Ltd shares Pinder Ltd shares ASX 200 index 10-year Government bond Standard deviation of returns (p.a.) 30% 20% 25% 0 Handley Ltd shares 1.0 0.6 0.8 0 Correlation coefficient (P1,2) Pinder Ltd shares 1.0 0.5 0 ASX 200 1.0 0 10-year Government bond 1.0 8. What is the standard deviation of returns for your portfolio (as a percentage to two decimal places – e.g. 10.03%)? [4 marks] 9. What is the beta of your portfolio (expressed to two decimal places e.g. 0.65)? [6 marks] 10. According to the CAPM, what is the expected return for your portfolio (as a percentage to two decimal places - e.g. 10.03%)? [2 marks]

Answer rating: 100% (QA)

To calculate the standard deviation of returns for the portfolio we need to use the following formula portfolio sqrtw12 12 w22 22 2 w1 w2 12 1 2 Where ... View the full answer