QUESTION 1 RISK AND RETURN [20 Marks]

The following information represents the details of Nihalka's portfolio consisting of the following shares:

Share	Percentage of Portfolio (%)	Beta	Expected Return (%)
A	20	1.00	16
B	25	0.85	14
C	15	1.2	20
D	30	0.6	12
E	10	1.6	18

The risk-free rate is 8% and the expected return on market portfolio is 16.2%.

REQUIRED:

A. Calculate and interpret portfolio beta. [3 Marks]

B. Calculate the expected return on Nihalka's portfolio using capital asset pricing model.

[3 Marks]

C. Given the information above, plot the security market line and plot all the shares from the portfolio on the graph. Clearly label the shares as underpriced or overpriced.

[7 Marks]

D. Differentiate between systematic risk and unsystematic risk.Provide two examples of each type of risk. [3 Marks]

E. Discuss the differences between realised returns and expected returns and explain the time period used to calculate each return. [4 Marks]

QUESTION 2 TIME VALUE OF MONEY - INDIVIDUAL INVESTMENT, BOND AND SHARES [20 MARKS]

A. You are planning to purchase a property in Nadi five years from today. To do this you estimate that you will need $52000 at the time of purchase. You have $5000 in your savings account today. You would like to accumulate the funds by making equal semi-annual deposits to your savings account. The interest rate provided by your savings account is 12% per annum. You will be making your first deposit at the end of this year, what will be the amount of each deposit? [6 Marks]

B. You are evaluating the purchase of Cellars, Inc. ordinary shares. The dividend to be paid in the end of first year is $1.80. You expect the dividend to grow at a rate of 12% for the next three years. You plan to hold the shares for three years and then sell it for $15. You estimate that a required rate of return of 17.5% will be adequate compensation for this investment. Calculate the present value of this share. [6 Marks]

C. ABC Ltd issued a bond with face value of $150000 and 4 years to maturity. Coupon is paid to the bondholders on a quarterly basis at a rate of 8% per annum. The required rate of return is 10% p.a. Calculate the maximum amount that the investor would be willing to pay for this bond today. [58 Marks]

D. Blue Flights Ltd, whose ordinary shares are currently selling for $40 per share, paid a $2.00 dividend this year. The investor believe that the dividends would grow at a rate of 5% per annum. Calculate investor required rate of return. [3 Marks]