The table below provides the possible returns for three securities - Bing-Yu, Bunga, and Bhavna: Economic Probability Bing-Yu Bunga Bhavna state Growth 30% 15% 12% 11% Stagnant 45% 5% 6% 4% Recession 25% -8% -3% 1% (a) You wish to invest RM28,000 in Bing-Yu, RM40,000 in Bunga, and RM12,000 in Bhavna. What is each security's portfolio weight? (1.5 marks) (b) What are the possible returns for your investment portfolio under each of the three economic states? (1.5 marks) (c) What are the expected return and standard deviation of returns for your investment portfolio? (4 marks) (d) If the risk-free interest rate is 4% and the market expected rate of return is 8%, what is the beta of your investment portfolio, assuming that the portfolio is fairly priced? (2 marks) (e) If the portfolio's beta is actually 0.4, should you invest in that portfolio? Justify your decision. (1 mark) (a) w1 = 28,000/(28,000+40,000+12,000) = 35% W2 = 40,000/(28,000+40,000+12,000) = 50% W3 = 12,000/(28,000+40,000+12,000) = 15% (b) ra = (0.35*15%) + (0.5*12%) + (0.15*11%) = 12.9% rb = (0.35*5%) + (0.5*6%) + (0.15*4%) = 5.35% rc = (0.35*(-8%)) + (0.5*(-3%)) + (0.15*1%) = -4.15% (c) rp = (0.3*12.9%) + (0.45*5.35%) + (0.25*(-4.15%)) = 5.24% sdp = [(((12.9% -5.24%)^2)*0.3) + (((5.35% - 5.24%)^2)*0.45) + (((-4.15% - 5.24%)^2)*0.25)]^(0.5) = 6.2969% (d) Bp = (5.24% -4%)/(8% -4%) = 0.31 (e) If the beta is higher than in (d), the required return would be higher than the expected return, and that means the portfolio is overpriced, and so, you should not invest in the portfolio. rp = 4% + [(8%-4%)*0.4] = 5.6%