Question 3 John has invested in a portfolio of three securities. Details of the securities' betas...

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Question 3 John has invested in a portfolio of three securities. Details of the securities' betas and anticipated returns for the forthcoming year are given below. Security A B C Sum Invested £5 million £3 million. £2 million Beta Anticipated Return (%) 0.7 14.0 1.1 15.0 0.8 13.4 The standard deviation of the portfolio is 16 percent. The Treasury bill rate of return and the risk premium on the market portfolio are 3 percent and 13 percent, respectively. Required: a. Determine if the three securities are mispriced and the actions John should take in response. Calculate the expected portfolio return (according to the CAPM). (18 marks) b. John expanded his portfolio by buying £5 million of T-bills. Compute the revised portfolio return, portfolio beta value and portfolio risk. (20 marks) c. Discuss the meaning of correlation coefficient and its role in reducing John's portfolio risk when he invested in the Treasury bill. (12 marks) Question 3 John has invested in a portfolio of three securities. Details of the securities' betas and anticipated returns for the forthcoming year are given below. Security A B C Sum Invested £5 million £3 million. £2 million Beta Anticipated Return (%) 0.7 14.0 1.1 15.0 0.8 13.4 The standard deviation of the portfolio is 16 percent. The Treasury bill rate of return and the risk premium on the market portfolio are 3 percent and 13 percent, respectively. Required: a. Determine if the three securities are mispriced and the actions John should take in response. Calculate the expected portfolio return (according to the CAPM). (18 marks) b. John expanded his portfolio by buying £5 million of T-bills. Compute the revised portfolio return, portfolio beta value and portfolio risk. (20 marks) c. Discuss the meaning of correlation coefficient and its role in reducing John's portfolio risk when he invested in the Treasury bill. (12 marks)