You have just been elected as a trustee of your company's retirement fund. A professional fund

manager has recommended a portfolios of three assets: Ashanti (stock A), Bokomo (stock B)

and T-bills (risk-free asset). You have gathered the following information:

E[R

A

] = 0.20, E[R

B

] = 0.10

SD (R

A

) 0.30, SD(R

B

) 0.20

CORR (R

A

,R

B

) = 0.2

rf = 0.03

5.1. Briefly explain what the capital allocation line (CAL) is.

(2)

5.2. Calculate the slope of the CAL for both Ashanti and Bokomo shares and indicate which

provides better investment opportunities when combined with T-Bills?

(3)

5.3. Provide two alternative names for the slope of the CAL.

(2)

5.4.Find the portfolio of T-Bills and Ashanti stock that has a target expected return of 14%. (3)

5.5 What is the standard deviation of this portfolio?

(3)

5.6 What is the name given to the type of portfolio created in 5.4?

(1)

6.

The following table shows risk-return measurements for two portfolios, R and the JSE ALSI. You are

also told that the return on 91 day tbills is 5%. Use the data in the table to answer questions below.

Portfolio

Average annual rate of return

Standard Deviation

Beta

R

11%

10%

0.5

JSE ALSI

14%

12%

1.0

6

6.1.When plotting portfolio R relative to the SML, portfolio will lie __________ the SML. (

Show all

workings)

(3)

6.2.When plotting portfolio R relative to the CML, portfolio R lies ________ the CML. (

show all

workings)

(3)

7.

As a trainee at Tri-Star Management Ltd, the CEO asks you to analyse the following information

pertaining to two share investments: Tech Co, and Sam's Grocery. Use the information given in the

table below to answer the questions that follow:

Estimated rate of return

Economy

Probability

Tech Co

Sam's Grocery

JSE ALSI

Recession

15%

-20%

5%

-4%

Average

35%

15%

6%

11%

Expansion

30%

30%

8%

17%

Boom

20%