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One lesson you learnt from this class is to invest early. Luckily, your company provides a superannuation fund plan. which allows you to invest in
One lesson you learnt from this class is to invest early. Luckily, your company provides a superannuation fund plan. which allows you to invest in fund HighP, which provides an expected return of 12%. Suppose that the expected market return is 10% and the risk-free rate is 2% p.a. compounded annually. a. If the CAPM model holds, what is the beta of fund HighP? [1 mark] b. If most people believe that fund HighP is too risky, your company is offering a second fund LowP which has 36% lower beta. How much less expected return will fund LowP have? [ 1 mark] c. In order to spread out your investment risk, you formed a portfolio using the two funds. If your objective is to earn the same return as the market when the market portfolio cannot be invested directly. how would you construct your portfolio? [ 2 marks] d. Suppose the market actually provides an average return of 9% from fund LowP. and your estimate of beta in (b) is correct, should you invest in fund LowP, and why? [2 marks]
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