Question 1 Read the scenarios below and answer the questions that follow:

1.1 Identify the suitable investment asset class in relation to the statements below.

1.1.1 Investor A holds investment in residential and commercial property.

1.1.2 Company ABC invests in unlisted stocks with growth potential to expand their working capital and strengthen their balance sheets.

1.1.3 XYZ Capital manages a fund for high net worth individuals and institutional investors. The fund seeks to generate consistently positive returns in all kinds of markets, with low correlation to other asset classes, in order to reduce risk

1.1.4 Investor B holds a contract to deliver gold after one year.

1.1.5 Investor C has always been fascinated by vintage cars and recently purchased one. He is aware that he has invested in something that can be enjoyed, but also that there is a lot of volatility in valuing the investment.

1.2 The following forecast information relates to Share A, Portfolio X and the market:

Risk-free rate 6%

Beta of Share A 1.2

Standard deviation of Share A 20%

Expected return of Share A 14%

Standard deviation of Portfolio X 18%

Expected return of Portfolio X 16%

Market return 11.4%

Variance of market return 0.0225

1.2.1 What is the variance of Share A?

1.2.2 Portfolio X holds an investors entire wealth. What is the price of risk (degree of risk aversion) of Portfolio X?

1.2.3 What is the market price of risk (risk aversion of the average investor)?

QUESTION 2

Company A enters into a short futures contract to sell 50 000 units of a commodity for 70 cents per unit. The initial margin is R4 000 and the maintenance margin is R3 000. Company B buys one December futures contract when the futures price is R1 010 per unit. Each contract is on 100 units and the initial margin per contract is R2 000. The maintenance margin per contract is R1 600. During the next day, the futures price falls to R1 005 per unit.

3.1 Consider Company A: At what futures price per unit will there be a margin call?

3.2 Consider Company B:

3.2.1 What is the balance of its margin account at the end of the day?

3.2.2 Will there be a margin call? Justify your answer.