Suppose the Australian share market has an expected annual return of 12% and an annualised standard deviation of 16%, and the yield on Commonwealth Government Securities is 3%. Also assume that margin loans are available for leveraged share investments at a borrowing cost rL of 5% and with a standard deviation of L of 2%. Calculate the standard deviation of the return for each of the following investments:

a) An investment in a diversified managed share fund with a beta of 0.9 (hint: what do you expect the value of to be for a diversified share fund?)

The standard deviation equals = 0.9 16% = 14.4%

c) A leveraged investment in the share fund in part (a), where the loan-to-value ratio is 40%