Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Use the following information to answer a). AAA Ltd BBB Ltd Expected Return 8% 10% Standard Deviation 16% 20% Beta 0.85 1.21 Correlation coefficient

image text in transcribed

Use the following information to answer a). AAA Ltd BBB Ltd Expected Return 8% 10% Standard Deviation 16% 20% Beta 0.85 1.21 Correlation coefficient between AAA Ltd and BBB Ltd is -0.22. Required: a) Assume that you have formed a two asset portfolio equally invested in AAA Ltd and BBB Ltd. i) Calculate the expected return of your portfolio. (2 marks) ii) Calculate the standard deviation of your portfolio. (3 marks) iii) Calculate the beta of your portfolio. (1 mark) iv) Assuming the risk free rate of 0.87% and the market risk premium of 6%, calculate the required rate of return for your portfolio. Is your portfolio underpriced or overpriced and why? (2 marks) v) Draw the Security Market Line using answers you obtained above. Label X-axis, Y-axis and intercept. Clearly present values on X- and Y-axis when you locate the expected and required returns of your portfolio in the graph. (4 marks) b) Suppose that the standard deviation of the returns on the shares of two different companies is exactly the same. Does this mean that the required rate of return will be the same for these two shares? Justify your answer. (3 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

Financial statements

Authors: Stephen Barrad

5th Edition

978-007802531, 9780324186383, 032418638X

More Books

Students also viewed these Finance questions