Suppose the New York Stock Exchange has an annual expected return of 14% and an annualised standard deviation of 19%. The yield on US treasury securities is 5%. Margin loans for leveraged share investments are available at a borrowing cost of 7% with a standard deviation of 4%.

a) Calculate the standard deviation of the return for the following investments and show all workings:

i. An investment in a diversified managed share fund with a beta of 0.8. (1 mark)

ii. An investment in the shares of a company, with a beta of 1.9, and residual risk of 40%. (1 mark)

iii. A leveraged investment in the share fund in part i, the loan-to-value ratio is 40%. (4 marks)

iv. A leveraged investment in the shares in part ii, the loan-to-value ratio is 40%. (4 marks)

b) Explain the impact of leverage and beta on the risk of share investments. (2 marks)