Nelson Ltd. is considering investing in one of two portfolios of financial investments. The company's objective...

 

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Nelson Ltd. is considering investing in one of two portfolios of financial investments. The company's objective is to reduce risk through diversification and it believes that the return on any individual investment is not correlated with the return on any other investment. The return on market portfolio is estimated to be 15% and the risk-free rate is 5%. The amount invested, the expected return, and betas for each portfolio are given as follows: Portfolio 1: Amount Equity beta Investment invested Expected return Total risk Company X Company Y $60 million 24% 11% 1.3 $40 million 26% 9% 1.4 Portfolio 2: Amount Equity beta Investment invested Expected return Total risk Company W Company Z $50 million 25% 12% 1.2 $50 million 26% 13% 1.4 Required: a. Calculate the expected return of each portfolio. b. Estimate the required rate of return on the two portfolios using the Capital Asset Pricing Model (CAPM). c. Critically discuss the advantages and disadvantages of utilising Portfolio Theory to assist with portfolio selection. (6 marks) (7 marks) (12 marks) Nelson Ltd. is considering investing in one of two portfolios of financial investments. The company's objective is to reduce risk through diversification and it believes that the return on any individual investment is not correlated with the return on any other investment. The return on market portfolio is estimated to be 15% and the risk-free rate is 5%. The amount invested, the expected return, and betas for each portfolio are given as follows: Portfolio 1: Amount Equity beta Investment invested Expected return Total risk Company X Company Y $60 million 24% 11% 1.3 $40 million 26% 9% 1.4 Portfolio 2: Amount Equity beta Investment invested Expected return Total risk Company W Company Z $50 million 25% 12% 1.2 $50 million 26% 13% 1.4 Required: a. Calculate the expected return of each portfolio. b. Estimate the required rate of return on the two portfolios using the Capital Asset Pricing Model (CAPM). c. Critically discuss the advantages and disadvantages of utilising Portfolio Theory to assist with portfolio selection. (6 marks) (7 marks) (12 marks)

Answer rating: 100% (QA)

Answer 1 The expected return of a portfolio is the anticipated amount of returns that a portfolio may generate The expected rate of return on a portfolio can be calculated with the following formula W... View the full answer