QUESTION 3: DISCOUNTED CASH FLOW, RISK AND RETURN [40 MARKS] a) Assume that you are nearinE graduation and have applied for a job with a local bank. The bank's evaluation process requires you to take an examination that covers several financial analysis technicues. The test addresses discounted cash flow analysis. Calculate the present value of the following uneven cash flow stream. The appropriates interest rate is 6.50 %, compounded annually. 5 Mark RM-50.000 RM300,500 650 RM300,550 CIMB Bank offers to lend you RM50,000 at a nominal rate of 5.50 % , compounded monthly. The loan (principal plus interest) must be repaid at the end of the year Maybank Bank also offers to lend you the RM50,000, but it will charge an annual rate of 7.00%, with no interest due until the end of the year. Determine much higher or lower is the effective annual rate charged by CIMB versus the rate charged by Maybank i [5 Marks b) You are considering the two securities listed below. Stock Stock A Stock B RM25.000 RM35.000 Initial Investment Stock A Economy Stock B Outcomes Probability Returns Returns Pessimistic 20% 5% 13% Normal 50% 10% 8% Optimistic 15% 30% -15% Calculate the expected return for portfolio. i 6 Marks i Calculate the standard deviation of returns for portfolio. 8 Marks Justify why diversification work best for these stocks i 6 Marks c) Suppose the return on market is 13.00 %, market volatility is 40.00 % and the risk-free rate is 4.00%. i)Using an illustration diagram of the Capital Asset Pricing Model (CAPM), formulate the equation of the Security Market Line (SML) based on the above information. 7 Marks] i Suppose a security has a beta of 1.20. According to the CAPM, compute its expected return 3 Marks