q2

(a) A fund manager is considering constructing a portfolio on the following companies: Americano Ltd 10,000 shares Capucino Ltd 15,000 shares Francesco Ltd 12,000 shares Italiano Ltd 20,000 shares The following information is provided for each company. Shares Nominal Market Dividend Beta Expected value (S) value (5) (S) return (%) Americano 5.00 9.50 1.50 1.2 16.0 Capucino 10.00 11.20 2.00 1.5 21.0 Francesco 5.00 7.50 1.00 0.8 12.0 Italiano 1.00 2.50 0.50 11 13.0 The risk-free rate of return is 7%, and the return on the market is 12%. (1) Calculate the expected rate of return on the portfolio (8 marks) (ii) Calculate the beta of the portfolio (4 marks) (iii) Calculate the required rate of return on the portfolio. (4 marks) (iv) Propose whether the fund manager should invest in this portfolio and justify why. (2 marks) (b) Evaluate the normal upward-sloping yield curve by using the expectation theory (7 marks) [25 Marks