Question 1 [7]

1.1. Calculate the arithmetic and geometric mean return for a stock with four-year annual returns of -7%, 10%, 50%, 15%. (2)

1.2. Calculate the standard deviation of annual investment returns, given the returns are 20.6%,

37.5%, 59.4%, and 33.8%. (2)

• ( -20.6 -37.5% +59.4% + 33.8% ) / 4 = 9.75%

1.3. Suppose an investor wishes to combine a T-bill, which offers the risk free rate of 4.1%, and shares in HPQ Inc. HPQ has an expected return of 11% and a standard deviation of 22%. The portfolio is to be comprised of 50/50 split between the T-bill and HPQ. Calculate the

portfolio expected return and standard deviation. (3)

• Expected return = 50% (4.1) + 50%(11)= 7.55%

Standard deviation = 11%

Question 2 [10]

2.1. An investor wishes to invest R15 000 in ABC Inc. which has a beta () which is half the market and R20 000 in GB Corporation which has a of 2.5. What is the beta of the portfolio?

(2)

2.2. Using the CAPM and SML, what is the expected rate of return for an investment with a of

1.8, a risk free rate of return of 4%, and a market rate of return of 10%? (1)

2.3. The following information is from:

Your Portfolio		The Market
Return	12%	ALSI return	10%
Standard Deviation	14%	Standard Deviation	12%
Beta	1.2	Risk-free rate	4%

Calculate Sharpes ratio and the Treynor Measure for both Your Portfolio and The Market and compare them. (7)

Question 3 [3]

Explain the characteristics of firm-specific risk. How might an investor limit his or her exposure to this type of risk?