1. Distinguish between effective annual rate (EAR) and annual percentage rate (APR). Suppose you receive a return of 5% on an investment, do you expect the EAR to be lower than the APR? Explain briefly. [5 marks] 2. What is the difference between excess return and risk premium? [3 marks] 3. Mr Berkoh acquired 200 shares of Pina-wise Ltd at GH1 each on January 1, 2015. The following schedule presents a history of dividends paid and market price per share as of the end of the financial years ending December 31. Dividend per share (GHC) Price per share (GH) Year 2015 2016 2017 0.25 0.30 0.40 Required: i) ii) What is the arithmetic average return? [2 marks] iii) 1.50 1.80 3.00 What is the rate of return on Berkoh's investment in each year? [3 marks] What is the standard deviation of returns from the arithmetic average return? [3marks iv) What is the geometric average return? [2 marks] 4. Your firm manages a risky portfolio of two stocks, A and B. the risky portfolio has an expected return of 21.5% and a variance of 1.48%. The alternative investment to your risky portfolio is the Government of Ghana 182-day bill which pays interest at the rate of 18%. Required: One of your firm's clients. Eunice whose risk aversion index is 3, wants to investment a portfolio comprising your firm's risky portfolio and the risk-free security. Suppose she puts GHS2,000 in the risky portfolio and GHS3,000 in the risk-free security. i) @@ iii) iv) v) What is Eunice's utility score for the risky portfolio made up of stock A and B [2 marks] What is the expected return on her complete portfolio? [2 marks] What is the standard deviation on her complete portfolio? [2 marks] Suppose Eunice is indecisive on how to allocate her funds between the risky portfolio and the risk-free security. Determine the proportion of her funds that should be put into the risky portfolio. [2 marks] Assuming there is an alternative risky portfolio that has expected return of 15% with a standard deviation of 10%. Compute the utility score of this risky portfolio for Eunice [2 marks]