You are interested in buying shares of The Mortgage Bank (TMB) and the Fresh Fruit Corporation (FFC) You estimate the betas to be 0 82 for TMB and 1 45 for FFC In addition, financial analysts agree that over the next year, the risk free rate is expected to be 4 while the expected return on the TSX composite index will be 12 a) What is the required rate of return on each of TMB and FFC (3 marks) b) Currently, TMB shares are selling at $45 per share while the shares of FFC are selling at $52 per share Neither TMB nor FFC pays dividends Your analysis suggests that in a year from today TMB shares are expected to reach $50 04 while the shares of FFC are expected to rise to $58 76 If you want to invest in TMB or in FFC but not both, which one would you choose and why (4 marks) Hint Find the return based on your analysis and then determine which security would give you the best reward to risk c) You decided to purchase 300 shares of FFC and 400 shares of TMB What will be the beta of your portfolio (4 marks) d) What portfolio of FFC and TMB will have a beta of 1 00 Hint Assume that the weight of FFC is w, the weight of TMB is (1 w), then you need to find w so that the beta of the portfolio is 1 00 (3 marks)

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Posted on Sep 11, 2024

You are interested in buying shares of The Mortgage Bank (TMB) and the Fresh Fruit Corporation (FFC). You estimate the betas to be 0.82 for TMB and 1.45 for FFC. In addition, financial analysts agree that over the next year, the risk-free rate is expected to be 4% while the expected return on the TSX composite index will be 12%.
a) What is the required rate of return on each of TMB and FFC? (3 marks)
b) Currently, TMB shares are selling at $45 per share while the shares of FFC are selling at $52 per share. Neither TMB nor FFC pays dividends. Your analysis suggests that in a year from today TMB shares are expected to reach $50.04 while the shares of FFC are expected to rise to $58.76. If you want to invest in TMB or in FFC but not both, which one would you choose and why? (4 marks) Hint: Find the return based on your analysis and then determine which security would give you the best reward to risk
c) You decided to purchase 300 shares of FFC and 400 shares of TMB. What will be the beta of your portfolio? (4 marks)
d) What portfolio of FFC and TMB will have a beta of 1.00? Hint: Assume that the weight of FFC is w, the weight of TMB is (1-w), then you need to find w so that the beta of the portfolio is 1.00. (3 marks)