You are considering three investments.

The first is a bond that is selling in the market at $1,200.The bond has a $1,000 par value, pays interest semi-annually at 10%, and is scheduled to mature in 10 years.For bonds of this risk class you believe that a 12% rate of return should be required.

The second investment that you are analysing is a preference share ($100 par value) that sells for $95 and pays an annual dividend of $10.Your required rate of return for this share is 10%.

The last investment is an ordinary share ($35 par value) that recently paid a $5 dividend.The firm expect to have a 8% dividend growth during the next four year and 6% growth rate there in after. You think a reasonable required rate of return for the share is 13%.

Required:

(a)Calculate the value of each security based on your required rate of return.

(b)Calculate the expected return of each security.

Question 21

You hold a portfolio with the following securities:

Security

% of Portfolio

Beta

Expected Return

Standard deviation

ABC

20%

1.20

16%

21%

XYZ

35%

1.00

12%

13%

WXA

45%

0.85

9%

11%

Current risk free rate is 6% and the expected return on the market portfolio is 11%

Required:

a)Explain what beta represents

b)Estimate the required rate of return for each assets/ Are they undervalued or overvalued. Explain.

c)Estimate the coefficient of the variance

d)Estimate the minimum and maximum expected return

e)Rank projects based on investors risk preference

f)Estimate portfolio beta and RRR return.