Question 5 (12 marks)

1. Describe the systematic and non-systematic risk components of the following financial assets:

i. 3-month US Treasury bill;

ii. Hang Seng Index (HSI) tracker fund with standard deviation (a total risk) of 20%.

(4 marks)

2. Consider two investments, X and Y. Investment X has a beta of 1.10 and a standard deviation of 17%, all of which is systematic risk. Investment Y has a beta of 0.95 and a standard deviation of 30%, half of which is non-systematic risk. Which investment should have a higher expected rate of return? Explain your answer.

(4 marks)

3. Mr. Jobs observes a strong demand for the new iPhones and plans to buy Apple stock. However, Mr. Jobs does not know what return he should expect from his investment. He does know that a risk-free rate is 2%, a market return is 10%, and Apples stock beta is 1.20. Help Mr. Jobs and calculate Apples expected return. Show your calculations.