Question 1

(a) Demonstrate the concept of market portfolio and identify the reasons why investors hold market portfolios. (10 marks)

(b) Suppose that the risk premium on the market portfolio is estimated at 8% with a standard deviation of 22%. What is the risk premium on a portfolio invested 25% in Toyota and 75% in Honda, if they have betas of 1.1 and 1.25 respectively? (5 Marks)

(c) Suppose that Toyota issues two bonds with identical coupon rates and maturity dates. One bond is callable, however the other is not. Which bond will sell at a higher price? (5 Marks) (d) Compare and contrast between bonds issued with coupon rate and zero-coupon bonds. (5 marks)