• Consider the investment information given below: and using the utility formula U = E(R_i) ? 0.5A?²

Investment	E(Ri)(%)	?2(%)
1	12	20
2	15	35
3	21	40
4	24	45

Given that the utility of investors is determined using the formula U = E(R_i) ? 0.5A?²

Required:

Which investment will an investor with a risk aversion coefficient of 4 choose? (2mks)Which investment will an investor with a risk aversion coefficient of 2 choose? (2mks)Which investment will a risk- neural investor choose? (2mks)Which investment will a risk-loving investor choose? (2mks)The risk-free rate is 10% and the expected return om the market portfolio is 15%. The expected returns of 4 stocks and their expected betas are listed below

Investment	E(Ri)(%)	?2(%)
A	17	1.3
B	14.5	0.8
C	15.5	1.1
D	18	1.7

Required

• On the basis of these expectations which securities are overvalued and which are overvalued? (2mks)
• If the risk-free rate were to rise to 12% and the expected return on the market rose to 16%, which securities are overvalued and which are overvalued? Assume that the expected returns and betas of the stock remained the same (2mks)

• Consider the following data for two risk factors (1 and 2) and two securities (J and L):

?0 = 0.05 b_J1 = 0.80

?1 = 0.02 b_J2 = 1.40

?2 = 0.04 b_L1 = 1.60

b_L2 = 2.25

Required:

Compute the expected returns for both securities.

• Suppose that Security J is currently priced at $22.50 while the price of Security L is $15.00[4mks]
• Further, it is expected that both securities will pay a dividend of $0.75 during the coming year. What is the expected price of each security one year from now? [4mks]

ASSET PRICING THEORIES ASSIGNMENT 1. Consider the investment information given below: and using the utility formula U = E(Ri) - 0.5A2 Investment E(Ri)(%) 2(%) 1 12 20 2 15 35 3 21 40 4 24 45 Given that the utility of investors is determined using the formula U = E(Ri) - 0.5A2 Required: i) Which investment will an investor with a risk aversion coefficient of 4 choose? (2mks) ii) Which investment will an investor with a risk aversion coefficient of 2 choose? (2mks) iii) Which investment will a risk- neural investor choose? (2mks) iv) Which investment will a risk-loving investor choose? (2mks) 2. The risk-free rate is 10% and the expected return om the market portfolio is 15%. The expected returns of 4 stocks and their expected betas are listed below Investment E(Ri)(%) 2(%) A 17 1.3 B 14.5 0.8 C 15.5 1.1 D 18 1.7 Required i) On the basis of these expectations which securities are overvalued and which are overvalued? (2mks) ii) If the risk-free rate were to rise to 12% and the expected return on the market rose to 16%, which securities are overvalued and which are overvalued? Assume that the expected returns and betas of the stock remained the same (2mks) 3. Consider the following data for two risk factors (1 and 2) and two securities (J and L): 0 = 0.05 bJ1 = 0.80 1 = 0.02 bJ2 = 1.40 2 = 0.04 bL1 = 1.60 bL2 = 2.25 Required: Compute the expected returns for both securities. i) ii) Suppose that Security J is currently priced at $22.50 while the price of Security L is $15.00[4mks] Further, it is expected that both securities will pay a dividend of $0.75 during the coming year. What is the expected price of each security one year from now? [4mks]