Corporate Finance

QUESTION 2 (25 MARKS) (UNIT 3) You are currently only invested in the KAF Dana Fund (aside from risk-free securities). The expected return for KAF Dana Fund is 13.50% with a volatility of 17.10%. Your broker suggests that you add Pacific Murni Berhad (PMURNI) to your portfolio. With a volatility of 54% PMURNI has an expected return of 18.00%. There is a zero correlation between PMURNI and KAF Dana Fund. Currently, the Malaysia Treasury Bill yields approximate 3.20%. (a) Show your working to prove whether your broker is right. (5 marks) (b) You follow your broker's advice and make a substantial investment in PMURNI stock so that, considering only your risky investments, 65% is in the KAF Dana Fund and 35% is in PMURNI stock. When you tell your finance tutor about your investment, your tutor says that you made a mistake and should reduce your investment in PMURNI. Justify your opinion whether your finance tutor is right. (7 marks) (c) You decide to follow your finance tutor's advice and reduce your exposure to PMURNI. Now PMURNI represents 15% of your risky portfolio, with the rest in the KAF Dana Fund Decide and justify whether this is the correct amount of PMURNI stock you should hold. (7 marks) Calculate the Sharpe ratio of each of the three portfolios. Decide on the portfolio weight in PMURNI stock that maximize the Sharpe ratio. (6 marks) (TOTAL MARKS: 25 MARKS] QUESTION 2 (25 MARKS) (UNIT 3) You are currently only invested in the KAF Dana Fund (aside from risk-free securities). The expected return for KAF Dana Fund is 13.50% with a volatility of 17.10%. Your broker suggests that you add Pacific Murni Berhad (PMURNI) to your portfolio. With a volatility of 54% PMURNI has an expected return of 18.00%. There is a zero correlation between PMURNI and KAF Dana Fund. Currently, the Malaysia Treasury Bill yields approximate 3.20%. (a) Show your working to prove whether your broker is right. (5 marks) (b) You follow your broker's advice and make a substantial investment in PMURNI stock so that, considering only your risky investments, 65% is in the KAF Dana Fund and 35% is in PMURNI stock. When you tell your finance tutor about your investment, your tutor says that you made a mistake and should reduce your investment in PMURNI. Justify your opinion whether your finance tutor is right. (7 marks) (c) You decide to follow your finance tutor's advice and reduce your exposure to PMURNI. Now PMURNI represents 15% of your risky portfolio, with the rest in the KAF Dana Fund Decide and justify whether this is the correct amount of PMURNI stock you should hold. (7 marks) Calculate the Sharpe ratio of each of the three portfolios. Decide on the portfolio weight in PMURNI stock that maximize the Sharpe ratio. (6 marks) (TOTAL MARKS: 25 MARKS]