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Question 2 (12 Marks) a) You have been placed in charge of a portfolio that comprises shares, bonds and cash. The prior year saw a neutral allocation of 55% in shares, 25% in bonds, and 20% in cash, while the portfolio allocation was 60% to shares, 15% to bonds, and 25% to cash. Furthermore, the following table presents the benchmark return, as well as the returns for each component of the portfolio, over the previous 12 months: Portfolio Benchmark Shares 7.2% 6.5% Bonds 4.6% 4.2% Cash 2.5% 2.5% Required: Calculate the excess return for the portfolio, and the contribution due to asset allocation and security selection. (4 Marks) b) Consider the following information regarding a risky portfolio's performance over the past 12 months, and that of the market (all percentages are per annum): Risky portfolio Market Return 24% 17% Beta 1.5 a(e) 16% 0% 1 Required: i. If the risk-free rate of return is 7.1% p.a, and the standard deviation on the market is 20%, calculate the M2 for the risky portfolio (4 Marks) ii. Provide a graphical representation of the M2 calculated above, in risk-return space, which illustrates the performance of the risky portfolio relative to the market. Ensure you correctly label the axes and present any lines and points, which are relevant. (4 Marks) Question 2 (12 Marks) a) You have been placed in charge of a portfolio that comprises shares, bonds and cash. The prior year saw a neutral allocation of 55% in shares, 25% in bonds, and 20% in cash, while the portfolio allocation was 60% to shares, 15% to bonds, and 25% to cash. Furthermore, the following table presents the benchmark return, as well as the returns for each component of the portfolio, over the previous 12 months: Portfolio Benchmark Shares 7.2% 6.5% Bonds 4.6% 4.2% Cash 2.5% 2.5% Required: Calculate the excess return for the portfolio, and the contribution due to asset allocation and security selection. (4 Marks) b) Consider the following information regarding a risky portfolio's performance over the past 12 months, and that of the market (all percentages are per annum): Risky portfolio Market Return 24% 17% Beta 1.5 a(e) 16% 0% 1 Required: i. If the risk-free rate of return is 7.1% p.a, and the standard deviation on the market is 20%, calculate the M2 for the risky portfolio (4 Marks) ii. Provide a graphical representation of the M2 calculated above, in risk-return space, which illustrates the performance of the risky portfolio relative to the market. Ensure you correctly label the axes and present any lines and points, which are relevant. (4 Marks)