Question 3 (13 marks) (a) A portfolio's beta is a better risk measurement for a well-diversified portfolio compare to the portfolio's standard deviation. Justify. (6 marks) (b) Suppose you have interested on two stocks, which are X and Y. Based on your analysis on these two stocks, their returns are primarily affected by two common factors, namely inflation and growth in GNP. The information for each stock is presented as follows: Bli (INF) Bri (GNP) Expected Risk Premium (%) Weight portfolio (%) 40 60 Stock x Stock Y 1.80 0.90 1.20 0.80 12 7.5 (i) Derive the general model for each stock. (2 marks) (ii) If you intend to establish a portfolio that consist stock X and stock Y. with their respective portfolio weight of 40 percent and 60 percent. Assume that the inflation rate was expected to be 3 percent, but in fact was 5 percent; meanwhile the growth in GNP was expected to be 8 percent, but in fact was 5 percent. What would be the expected return on your portfolio if the risk-free rate is 3 percent? (5 marks) Question 4 (9 marks) Lesus Inc. has decided to expand its business by establishing a subsidiary in Australia for accommodating the increase in foreign aggregate demand and expected to start to operate at the beginning of year two. Assume there is no growth of the dividend before the subsidiary starting to operate. Financial analysts in the company predict that the firm will grow at an extraordinary rate of 25% for 3 years after the new subsidiary started to be operated, followed by another 1 years of unusual growth of 15%, and finally grow at 7% per annum for an indefinite number of years. The company just paid a dividend of RM0.80 per ordinary share. The required rate of return for the companies with same nature of business is 15%. Compute the intrinsic value of the target firm be today. (9 marks)