(a) An investor is evaluating a two-asset portfolio of the following securities: Assumptions Expected Return Expected Risk...
Question:
(a) An investor is evaluating a two-asset portfolio of the following securities:
Assumptions Expected Return Expected Risk ()
Miner Inc. (US) 19.6% 22.8%
Camp Ltd. (UK) 16% 25%
If the two securities have a correlation of +0.5, what are the expected risk and return
for a portfolio that has the minimum combined risk?
(b) Maria, CFO of Trident Inc., estimates that the risk-free rate is 2.5%, the company's
credit risk premium is 5%, the domestic beta is 1.1 and the international beta is 0.95.
The company's capital structure comprises 25% debt and 75% equity. The expected
rate of return on the market portfolio held by a well-diversified domestic investor is
11%. The expected market return for a larger globally integrated equity market is 10%.
The corporate income tax rate is 30%. For both the domestic CAPM and ICAPM,
calculate Tridents weighted average cost of capital.