Question 2(a)

3)

5

The correlation between shares X and Y is 0.65, while correlation between shares X and Z is -0.65. You already own share X and are thinking of buying either share Y or share Z. If you want your portfolio to have the lowest possible risk, would you buy share Y or Z? Would you expect the share you choose to affect the return that you earn on your portfolio? (4 marks)

Quiz Information

Question 2(b)

Supreme Limited is a large customer of the Bank of Taiwan and the Bank lends funds to Supreme at 5% annual interest rate. The CFO of Supreme says that the company can use this 5% as the discount rate to evaluate all projects that the firm is considering for the next three years. Discuss whether the CFO is correct. (4 marks)

Question 2(c)

From the figure below explain why diversifiable risk is becoming less and less whereas non-diversifiable risk remains same? Out of these two types of risk, for which risk investor will