llll 82% 20:44 4G part a - Read-only Part A (50% marks) Qstion I:(10 marks) The following table provides a sample of monthly actusl share price and end of period dividend data for fams A B and C Fim A Fim B Firm C Start Price Dividend Start Price Dividend 2594.0 Dividend Period Start Price 1036 547 2 2 306 2 2772.5 530.0 2952 2704.5 40.4 5700 24.4 297.6 2810.0 S13.0 273.4 2692.0 486.0 2717.0 24.9 491.8 495.1 257.1 8.8 7 2522 2708.0 What are the monthly holdingg period retuns for all firms a. hWhat is the arithmetie average holding period retum for all firms c. What are the variance and standard deviation of the returns for all firms? dHow many pairs of securities are possible and what is the conelation coefficient between all of them Qpestion 2: (10 marks) The poetfolio manager of XYZ hank recently used reports from its securities analysts o develop the following efficient portfolios Portfolis Expected rate of retun Variane 25 36 8% 10% 15 % 64 20% 25% 169 324 a. If the risk free rate of interest is 3% which portfolio is best? (Show calculations and explain your anewer) bAsume that the portfolio manager would like to eam an expected rate of return of 10% with a sandard devition of 4% , is this poable (Show cakulations and explain your arswer) c. If a standard deviation of 12 % was acceptable to the portfolio manager, what llll 82% 20:44 4G part a - Read-only would be the expected return and how coukld it best be ahieved (Show calculations and explain your answer) dWhat is the expected rate of return on a combined portfolio made up of all the above S portolics with an equal weighting given lo ech portfolio Would the standard deviation of this combined portfolio be higher or lower than that of portfolio 3 or is it nt possible to say? (Show calculations and explain your answer) Question 3: (10 marks) The correlation coefficients between pairs of stocks are as follows Corr (A, C)-060 Co (A, B) 085, Cor (A, D)04. Each stock has an espected retum of % and a variance of 0.04. If the entine portfolio is now oomposed of stock A and you can add cly one stock o your patfolio would you chocse sock B, C ar D (Show calculations and esplain your answerk Qstion 4: (20 marks) Assume that the following data represernt alll risky assets in the economy. All nisky assets in the economy Correlation Coefficient Matrix. Risky asset Value (f millions) Standard deviation C A 0.05 02 0.1-0. 0.10 0.2 03 015 C 020 0.1 03 05 0.30 -0.1 0.15 05 a What is the market portfolio ie. what percentage of each security must be invested to achieve the market portfolio? What is the standard deviation of the market portolio? (Show calculations and explain your answer) b If the risk free rate of return is 2 % and the expected return on the market portfolio- is T% what is the Capital Market Line equation? (Show calculations and explain your anwerk Ifthe risk free rate of return is 2 % and the expected return on the market portfolio- e. is 7%, what is the Security Market Line equation? (Show cakulations and explain your anwer) l 83% 20:44 4G part a - Read-only 4 A persion fund that you re advising wishes so have n expected ae of retun od 5% How should the fund invest to obtain this? What would be the standard deviation and he beta of the pension fand's position? (Show ealculations and explain your answer) e. You would like to have an expected return of 10% How should you imvest your money to obtain this? (Show calculations and explain your answer) Part B (50% marks) Qpestion 5 (50 markst General equilirium models of set pricing allow us lo deermine the selevant measure of risk for any asset and the relationship between expected return and risk Two of these models have been subject to fieroe dehate among peactitioners and academics, The Capital Asset Pricing Model (CAPM) and The Arbitrage Pricing Model (APT) Based on the assumpticns and tests of each model you are asked to: 1. Critically analyse the assumptions of both models 2 Discuss the similarities and differences between them 3. If you re a portfolio manager and had to choose one of the models, which one would you pick up and why? In the analysis, students are advised to look into issues suh as: a The ability of each model to explain sysiematic risk b Usefalness in predicting excess expected returns. e. Abilty of each model on building up a well-diversified portfoli d Main empirical findings related to the models Below is the list of academic journal articles you might find useful. llll 82% 20:44 4G part a - Read-only Part A (50% marks) Qstion I:(10 marks) The following table provides a sample of monthly actusl share price and end of period dividend data for fams A B and C Fim A Fim B Firm C Start Price Dividend Start Price Dividend 2594.0 Dividend Period Start Price 1036 547 2 2 306 2 2772.5 530.0 2952 2704.5 40.4 5700 24.4 297.6 2810.0 S13.0 273.4 2692.0 486.0 2717.0 24.9 491.8 495.1 257.1 8.8 7 2522 2708.0 What are the monthly holdingg period retuns for all firms a. hWhat is the arithmetie average holding period retum for all firms c. What are the variance and standard deviation of the returns for all firms? dHow many pairs of securities are possible and what is the conelation coefficient between all of them Qpestion 2: (10 marks) The poetfolio manager of XYZ hank recently used reports from its securities analysts o develop the following efficient portfolios Portfolis Expected rate of retun Variane 25 36 8% 10% 15 % 64 20% 25% 169 324 a. If the risk free rate of interest is 3% which portfolio is best? (Show calculations and explain your anewer) bAsume that the portfolio manager would like to eam an expected rate of return of 10% with a sandard devition of 4% , is this poable (Show cakulations and explain your arswer) c. If a standard deviation of 12 % was acceptable to the portfolio manager, what llll 82% 20:44 4G part a - Read-only would be the expected return and how coukld it best be ahieved (Show calculations and explain your answer) dWhat is the expected rate of return on a combined portfolio made up of all the above S portolics with an equal weighting given lo ech portfolio Would the standard deviation of this combined portfolio be higher or lower than that of portfolio 3 or is it nt possible to say? (Show calculations and explain your answer) Question 3: (10 marks) The correlation coefficients between pairs of stocks are as follows Corr (A, C)-060 Co (A, B) 085, Cor (A, D)04. Each stock has an espected retum of % and a variance of 0.04. If the entine portfolio is now oomposed of stock A and you can add cly one stock o your patfolio would you chocse sock B, C ar D (Show calculations and esplain your answerk Qstion 4: (20 marks) Assume that the following data represernt alll risky assets in the economy. All nisky assets in the economy Correlation Coefficient Matrix. Risky asset Value (f millions) Standard deviation C A 0.05 02 0.1-0. 0.10 0.2 03 015 C 020 0.1 03 05 0.30 -0.1 0.15 05 a What is the market portfolio ie. what percentage of each security must be invested to achieve the market portfolio? What is the standard deviation of the market portolio? (Show calculations and explain your answer) b If the risk free rate of return is 2 % and the expected return on the market portfolio- is T% what is the Capital Market Line equation? (Show calculations and explain your anwerk Ifthe risk free rate of return is 2 % and the expected return on the market portfolio- e. is 7%, what is the Security Market Line equation? (Show cakulations and explain your anwer) l 83% 20:44 4G part a - Read-only 4 A persion fund that you re advising wishes so have n expected ae of retun od 5% How should the fund invest to obtain this? What would be the standard deviation and he beta of the pension fand's position? (Show ealculations and explain your answer) e. You would like to have an expected return of 10% How should you imvest your money to obtain this? (Show calculations and explain your answer) Part B (50% marks) Qpestion 5 (50 markst General equilirium models of set pricing allow us lo deermine the selevant measure of risk for any asset and the relationship between expected return and risk Two of these models have been subject to fieroe dehate among peactitioners and academics, The Capital Asset Pricing Model (CAPM) and The Arbitrage Pricing Model (APT) Based on the assumpticns and tests of each model you are asked to: 1. Critically analyse the assumptions of both models 2 Discuss the similarities and differences between them 3. If you re a portfolio manager and had to choose one of the models, which one would you pick up and why? In the analysis, students are advised to look into issues suh as: a The ability of each model to explain sysiematic risk b Usefalness in predicting excess expected returns. e. Abilty of each model on building up a well-diversified portfoli d Main empirical findings related to the models Below is the list of academic journal articles you might find useful