ONON DEPARTMENT OF REAL ESTATE AND CONSTRUCTION RECO4006: ADVANCED VALUATION August 2, 2019 Time: 9:30 a.m. - 12:30 p.m. 6. The Triple Happiness Mutual Fund's investment portfolio previously included only risk-free assets [say, U.S. T-bills], and a well-diversified (market) portfolio [say, S&P500], but has no specific investments in real estate. The fund has planned to diversify its investment portfolio to include indirect real estate and considered purchasing shares of three listed real-estate companies. Table 6.1 shows the (incomplete) estimates of the risk and return characteristics of the share prices of the three companies during the five years ending July 2019: Table 6.1: Risk and return characteristics Company ABC Residual Expected Return Standard Deviation (SD) beta standard deviation 16% ??? 1.2 12% ??? 30% 0.8 5% 8% 15% 0.4 ??? (a) Suppose that CAPM holds, (i) Compute the missing information (???) above. (6 marks) (ii) Discuss the weaknesses of using CAPM for analysis in this scenario. (7 marks) (b) Suppose company B is mispriced (according to CAPM) and its corresponding expected return is at 10% (B = 10%) in the market. Apply Treynor-Black model to construct an optimal risky portfolio to compute its expected return, its expected risk and Sharpe ratio. (12 marks) - END OF PAPER -