A client of the firm holds the following shares in an investment portfolio:

Ocka Limited

$60,000,000

beta 0.9

Techno Limited

$40,000,000

beta 1.3

Mega Bank Limited

$80,000,000

beta 0.8

a. Explain the beta coefficient for each of the above stocks.

b. What is the level of risk of the portfolio as measured by beta?

The weighted average beta of the portfolio is:

Ocka Limited

Amount: $60,000,000

beta: 0.9

Techno Limited

Amount: $40,000,000

Beta: 1.3

Mega Bank Limited

Amount: $80,000,000

Beta:0.8

c. If the investor added to the above portfolio with the purchase of $90,000,000 worth of shares in WOW Ltd (beta 1.8), what impact would that purchase have on the risk structure of the portfolio?

If the investment in WOW Ltd. is added to the portfolio the weighted average beta of the portfolio becomes:

WOW Limited

Amount: $90,000,000

Beta: 1.80

Ocka Limited

Amount: $60,000,000

Beta: 0.90

Techno Limited

Amount: $40,000,000

Beta: 1.30

Mega Bank Limited

Amount: $80,000,000

Beta: 0.80

• By adding the risky investment in WOW Ltd. the investor has increased the average systematic risk associated with the portfolio.

d. The last dividend paid to shareholders by Mega Bank Limited was $1.80 per share. You have read through the latest reports including further analysis using a Bloomberg market data terminal and report that the board of directors of Mega Bank plan to maintain a constant dividend growth policy of 4 % per annum. You also calculate the historical expected return of the S&P ASX/200 to be 7 % per annum and that the rate of return on the 5-year Australian government bond is 2% per annum. If the current price of Mega Bank shares in the share market is $89.50, should you place a buy, or a sell target on the shares? (Show your calculations.)