QUESTION 3 [(a. I. + b. = 6 + 6 = 12 Marks) + (REC'NS: a. ii. and iii. = 2 + 2 = 4 Marks)] a. Mildred Downes wishes to invest $400,000 in an Australian banking stock for 5 years, but is unsure as to which of two banking stocks, A Bank Ltd or B Bank Ltd, to select. She seeks your advice. You discover the following information. A. A Bank Ltd has a beta of 0.7 and a standard deviation of 18%. B Bank Ltd has a beta of 1.1 and a standard deviation of 28% C. The market has an expected return of 13%. The risk-free rate is 5% Assuming that the capital asset pricing model applies, B. D. i. ii. iii. calculate the expected return of each bank; advise which bank Mildred should invest in, assuming that she is risk averse (a moderately conservative investor), stating your reasons for your choice; and if you discover that Mildred is single, aged 35 years, lives in a rental apartment, has no dependents, earns an annual salary of $80,000, has a permanent job with a large company, is debt-free and the above $400,000 represents her total wealth, what alternative investment advice would you provide to her? Describe fully, with reasons for your advice b. In the following problem, assume that the market is in equilibrium, both portfolios are efficient and that the capital asset pricing model holds. Bright Fund and Best Fund are two well diversified portfolios: Best Fund has an expected return of 15% and a beta of 1.3, while Bright Fund has an expected return of 11% and a beta of 0.9. Calculate the following measures, showing each answer as a percentage, correct to 2 decimal places. i. The expected market return. ii. The risk-free rate