Hand in Problem Set 2

Please hand a paper copy and Departmental Cover Sheet of your work to your class teacher at

the beginning of class 8 (week 9).

Minicase ? CAPM

After selling 16.5 million shares in Fin-Tech?s IPO founder David Smith received $867m

which he wishes to invest wisely. He has contacted three young and very eager investment

managers (LSE graduates) to research the market opportunities and propose an optimal

investment portfolio. The best candidate will have the chance to become Smith?s wealth

manager. Mr Smith will not hire candidates that propose either inefficient or infeasible

portfolios.

Assume that all securities are priced according to the CAPM and that the risk free rate is 2%.

The expected excess return on the market portfolio is 8% and the standard deviation is 20%.

The three candidates proposed portfolios with the following characteristics:

Candidate

Bo

Michael

Aditi Expected Return

8%

12%

13% Standard Deviation

10%

25%

30% 1. Who do you think will be hired by Mr Smith and why?

2. How can the expected return of the wining portfolio be achieved? Specify the amount

invested in each asset/portfolio of assets?

3. What is the beta of the winning portfolio?

4. If Mr Smith holds his position for one year what is the total amount of money he

expects to earn on his investment?

Show all of your calculations and explain your approach.

Hand in Problem Set 2 Please hand a paper copy and Departmental Cover Sheet of your work to your class teacher at the beginning of class 8 (week 9). Minicase - CAPM After selling 16.5 million shares in Fin-Tech's IPO founder David Smith received $867m which he wishes to invest wisely. He has contacted three young and very eager investment managers (LSE graduates) to research the market opportunities and propose an optimal investment portfolio. The best candidate will have the chance to become Smith's wealth manager. Mr Smith will not hire candidates that propose either inefficient or infeasible portfolios. Assume that all securities are priced according to the CAPM and that the risk free rate is 2%. The expected excess return on the market portfolio is 8% and the standard deviation is 20%. The three candidates proposed portfolios with the following characteristics: Candidate Bo Michael Aditi Expected Return 8% 12% 13% Standard Deviation 10% 25% 30% 1. Who do you think will be hired by Mr Smith and why? 2. How can the expected return of the wining portfolio be achieved? Specify the amount invested in each asset/portfolio of assets? 3. What is the beta of the winning portfolio? 4. If Mr Smith holds his position for one year what is the total amount of money he expects to earn on his investment? Show all of your calculations and explain your approach