Q1) You discover an investment costing $2,000 which has an expected total return of 13% pa, but a required return of only 9% pa. Of the 13% pa total expected return, the capital return is expected to be 7% pa. Assume that the required return of 9% remains constant, the dividends can only be re-invested at 9% pa and all returns are given as effective annual rates. Which of the following statements is NOT correct?

a. The investment is currently under-priced

b. You would use a discount rate of 13% to find the NPV of this investment

c. The investments price at time t=20 would be $7,739.37

d. The expected dividend return is 6%

e. When plotted on the Security Market Line, the investment would have a positive alpha.

Question 8 An investor has a portfolio of two assets A and B. The details are shown in the below table. Not yet saved Portfolio Details Marked out of 4.00 Expected Standard Expected Asset Covariance (A, B) return deviation Portfolio Return P Flag question A 0.02 0.4 0.12 0.08 B 0.06 0.8 Which one of the following statements is NOT correct? O a. The correlation of asset A and B's returns is 0.375. O b. The asset A could represent a share or a bond. O c. The portfolio has no diversification at all since the covariance between two assets is positive. d. The portfolio weight in asset A is -50%. d e. The standard deviation of the portfolio is 1.14