Question 2 (total of 10 marks): An investor has a portfolio of two securities, stock XYZ and an exchange traded fund (ETF) that tracks the ASX200 and charges negligible fees. Assume that the ASX200 ETF is the market portfolio. Details about risk free government bonds are also provided, though the investor holds none. The following table summarises the investors' holdings. Note that they have zero treasury bonds. Assume that returns are effective annual rates (also called net discrete returns).

Portfolio Details
	XYZ	ASX200 ETF	Government bond
Investment	$70,000	$130,000	$0
Expected return	11% pa	8% pa	2% pa
Total standard deviation	60% pa	30% pa	0% pa
Beta	1.5	1	0
Correlation between XYZ and ASX200	0.75

Do not enter your answers as percentages. Provide all answers as decimals correct to at least 6 decimal places. So for example if your answer is 1.23456789%, write 0.0123456789.

Question 2a (2 marks): What is the portfolio's total expected return pa? Give your answer as a decimal thats correct to 6 decimal places or more. So for example if your answer is 1.23456789%, you can write 0.0123456789.

Answers: Answer

Question 2b (2 marks): What is the portfolio's total variance of returns pa? Give your answer as a decimal thats correct to 6 decimal places or more. So for example if your answer is 1.23456789%, you can write 0.0123456789.

portfolio variance:

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Question 2c (2 marks): What is the beta of the portfolio? Give your answer as a decimal thats correct to 6 decimal places or more. So for example if your answer is 1.23456789%, you can write 0.0123456789.

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Question 2d (2 marks): What is the portfolio's systematic variance of returns pa? Give your answer as a decimal thats correct to 6 decimal places or more. So for example if your answer is 1.23456789%, you can write 0.0123456789.

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Question 2e (2 marks): Comparing stock XYZs expected return and its CAPM required return, is stock XYZ over, under or fairly priced? Assume that the ASX200 ETF and the government bonds are fairly priced. Select from the below choices:

Answer: Over-priced or Fairly priced or Under-priced