Question 1 (15 marks)

Use the following information to answer a).

WOW Ltd	Price	Dividend
1 Jan 2020	$41.84
4 March 2020		$0.46
1 July 2020	$38.68

a) Assume that you purchased WOW Ltd shares on 1 Jan 2020 and sold them on 1 July 2020. A dividend of $0.46 was paid on 4 Mar 2020. Calculate the realised return for the period. (2 marks)

Use the following information to answer b).

	BHP Ltd	S&P/ASX200
Monthly average return	1.3%	0.17%
Standard Deviation	7.87%	4.38%
Covariance between BHP and S&P/ASX200	0.0020

b) Compute the following.

i) Calculate the correlation coefficient between BHP and S&P/ASX200 and interpret the answer. (2 marks)

ii) Calculate the beta of BHP and interpret the answer. (2 marks)

iii) Assuming the market risk premium of 6% and the risk-free rate of 1%, compute the required rate of return of BHP Ltd. (2 marks)

iv) Assuming the annual average return of 15% for BHP, is BHP underpriced or overpriced? Would you buy or sell BHP shares? (3 marks)

v) Draw the Security Market Line using answers you obtained above. Label X-axis, Y-axis and intercept. Clearly present values on X- and Y-axis when you locate the expected and required returns of BHP Ltd in the graph. (4 marks)

PLEASE SHOW ALL WORKINGS AND DO NOT USE EXCEL