Question 7 Two securities are being considered for investment. We shall label these securities T and V. As an alternative being there is hold a risk-free security. The expected returns, standard deviation of historical returns and the individual stock's betas are given in Table 2. Table 2: Securities Considered in Question 7 Expected Return Standard Deviation Beta Security T 9% 4.20 1.09 Security v 6% 3.10 0.84 Risk-free Security 4% The correlation between securities T and V is 0.72. (a) Complete Table 3 below for portfolios using the information given in the question. Table 3: Portfolio Information to Complete P Description WT Wy Portfolio Portfolio Beta Return ERP risk op 1 80% in T and 20% in V 0.80 0.20 2 Portfolio beta is 1.02 1.02 3 Target ER(P) = 8% 8.00 4 0 30% in T and 70% in risk 0.30 free security Here P is the portfolio number. Wr and wy are the weights in security T and V respectively. [20 marks] (b) During a market crash, which of the two stocks would it be best to hold? Use information in the question and your own wider knowledge of investment decisions [5 marks] End of Paper Question 7 Two securities are being considered for investment. We shall label these securities T and V. As an alternative being there is hold a risk-free security. The expected returns, standard deviation of historical returns and the individual stock's betas are given in Table 2. Table 2: Securities Considered in Question 7 Expected Return Standard Deviation Beta Security T 9% 4.20 1.09 Security v 6% 3.10 0.84 Risk-free Security 4% The correlation between securities T and V is 0.72. (a) Complete Table 3 below for portfolios using the information given in the question. Table 3: Portfolio Information to Complete P Description WT Wy Portfolio Portfolio Beta Return ERP risk op 1 80% in T and 20% in V 0.80 0.20 2 Portfolio beta is 1.02 1.02 3 Target ER(P) = 8% 8.00 4 0 30% in T and 70% in risk 0.30 free security Here P is the portfolio number. Wr and wy are the weights in security T and V respectively. [20 marks] (b) During a market crash, which of the two stocks would it be best to hold? Use information in the question and your own wider knowledge of investment decisions [5 marks] End of Paper