Assignment 1: (30 marks)

(a) If two assets' returns are positively correlated, what is the covariance between the

returns of these two assets? (8 marks)

(b) What is the relation between the correlation between and among assets and

diversification? (12 marks)

(c) How does an efficient portfolio relate to a feasible portfolio? (10 marks)

Assignment 2: (40 marks)

Black & White Ltd produces a range of central heating systems for sale to builders'

merchants. Because of increasing demand for the business's products, the directors have

decided to expand production. The cost of acquiring new plant and machinery and the

increase in working capital requirements are planned to be financed by a mixture of long-

term and short-term borrowing.

Required:

(a) Discuss the major factors that should be taken into account when deciding on the

appropriate mix of long-term and short-term borrowing necessary to finance the expansion

programme. (30 marks)

(b) Discuss the major factors that a lender should take into account when deciding

whether to grant a long-term loan to the business. (10 marks)

Assignment 3: (30 marks)

(a) What is the role of diversification in the capital asset pricing model? (10 marks)

(b) Indicate why you agree or disagree with justifications to the following statements:

(i) "As a percentage of the total risk, the unsystematic risk of a diversified portfolio

is greater than that of an individual asset." (10 marks)

(ii) "An investor should be compensated for accepting unsystematic risk." (10

marks)