Question 3 En. Rusdi has a portfolio of three assets. Find the expected rate of return for the portfolio assuming he invests 50 percent of his money in asset A with 10 percent rate of return, 30 percent in asset B with a rate of return of 20 percent, and the rest in asset C with 30 percent rate of return. [4 marks] Assuming a risk-free rate of 8 percent and a market return of 12 percent, would a wise investor acquire a security with a Beta of 1.5 and a rate of return of 14 percent given the information above? [4 marks] Mr. Thong is considering investing in a project with beta coefficient of 1.75. What would you recommend him to do if this investment has an 11.5 percent rate of return, risk-free rate is 5.5 percent, and the rate of return on the market portfolio of assets is 8.5 percent? d. [4 marks] A firm is considering diversifying into another line of business. The opportunities available - copper mines, machinery construction, natural gas exploration and metal fabricator, have about the same expected returns, and the firm is interested in lowering its overall risk. The investments and their correlation coefficients are given as follows: copper mines = 0.70, machinery construction = 1.00, natural gas exploration = 0.20, and metal fabricator = 0.00. Which should the firm choose? Why? [4 marks] The distributions of rates of return for Companies AA and BB are given below: e. Probability of State Occurring State of Economy Boom Normal Recession AA BB 30% -10% 105 -5 50 We can conclude from the above information that a rational risk-averse investor will add Security AA to a well-diversified portfolio rather than Security BB. Why or why not? [9 marks] [TOTAL: 25 MARKS]