Refer to the following information on the return distribution for two assets in which you are...

  

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Refer to the following information on the return distribution for two assets in which you are contemplating to invest in; State of Economy Probability that the state of economy Return if the state Return if the state occurs occurs occurs Asset AA Asset BB BOOM 10% 40% 60% AVERAGE 40% 20% 30% BELOW AVERAGE 20% 20% 10% POOR 30% -20% -30% In addition to the above return distribution the two assets (AA & BB) operate in different industries and hence characterized by a market risk (Beta) of 2 and 3 respectively. The market risk premium (RM-RF) or the slope for fairly correctly priced assets is 14%. In the same economy government treasury bills reward a risk free return of about 11%. Required: a. Calculate the expected return for assets AA & BB respectively [4 marks] b. Calculate the required rate of return assets AA & BB respectively using the CAPM [4 marks] c. Calculate the standard deviation for assets AA & BB respectively [4 marks] d. If the company wants to invest in the two assets with the ratio of 45:55 what is the portfolio standard deviation and Portfolio return [4 marks] e. If the company wants to invest in the two assets with the ratio of 50:50 what is the portfolio Beta and Portfolio required rate of return [4 marks] Refer to the following information on the return distribution for two assets in which you are contemplating to invest in; State of Economy Probability that the state of economy Return if the state Return if the state occurs occurs occurs Asset AA Asset BB BOOM 10% 40% 60% AVERAGE 40% 20% 30% BELOW AVERAGE 20% 20% 10% POOR 30% -20% -30% In addition to the above return distribution the two assets (AA & BB) operate in different industries and hence characterized by a market risk (Beta) of 2 and 3 respectively. The market risk premium (RM-RF) or the slope for fairly correctly priced assets is 14%. In the same economy government treasury bills reward a risk free return of about 11%. Required: a. Calculate the expected return for assets AA & BB respectively [4 marks] b. Calculate the required rate of return assets AA & BB respectively using the CAPM [4 marks] c. Calculate the standard deviation for assets AA & BB respectively [4 marks] d. If the company wants to invest in the two assets with the ratio of 45:55 what is the portfolio standard deviation and Portfolio return [4 marks] e. If the company wants to invest in the two assets with the ratio of 50:50 what is the portfolio Beta and Portfolio required rate of return [4 marks]