Question 2 Answer Q2(d) only You plan to invest part of your savings and are examining the following data: Beta Yield to maturity on 10-year government bonds Stock A Stock B Stock C Expected return 2% 20% 9% 7% 1.3 1.1 0.5 Portfolio D 10% 1.0 If only Portfolio D is correctly priced, are stocks A, B and C correctly priced? If not, what investment action would you recommend for each stock to take advantage of the price anomaly? (10 marks) (b) Company X has just paid a dividend of $0.20 per share. The company expects dividends to grow at 5% per annum for the foreseeable future. It is trading at $10 in the market. You feel that, given the risk of this company, your required return on this stock is 8%. Is the market assigning a lower or higher risk to this stock compared to its fair value? Appraise this observation in relation to the SML. (10 marks) (c) You currently hold a diversified portfolio of stocks. Your investment advisor urges you to invest in gold which has a beta of -0.5. How does gold's expected return compare to the risk-free rate, according to the CAPM? Appraise whether you should add gold to your existing portfolio and explain why or why not. (5 marks) (d) G Hospital is looking at investing in a medical device which costs $1 million. It expects medical advances for such equipment to move forward quite rapidly such that the machine may be replaced by better more advanced and efficient machines in 3 years time. Discuss the various methods in project selection and assess their suitability for the analysis of this investment. Select two (2) methods which may be used in conjunction with each other to determine whether to invest in the medical device and give reasons for your choice. (15 marks)