Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Real Life Money An Honest Guide To Taking Control Of Your Finances

Authors: Clare Seal

1st Edition

1472272293, 978-1472272294

More Books

Students also viewed these Finance questions

Question

What is operatiing system?

Answered: 1 week ago