Expected Portfolio Return and Risk
Suggested Answers to Previous Semesters Exam Questions
Question 4 (Semester 2, 2005)
96633337 Juan
(a) Expected Portfolio Return and Risk
Expected Return
Risk
Covariance = (0.002)(0.06)(0.09)=0.0000108
(b) Minimum Variance (Pendix Ltd)
The minimum variance for this portfolio is 0.693, indicating that risk is minimized when 69.3 percent of the portfolio is invested in Pendix’s shares. A rational investor would not allow Pendix’s shares to account for more than this proportion as they could get a higher return and lower risk by reducing Pendix’s shares below this amount. (A diagram here is helpful).
Question 5 (Semester 1,2007)
(a) Expected Return and Risk
(1.00)(0.03) + (0.00)(0.18) = 0.03
(0.70)(0.03) + (0.30)(0.18) = 0.075
(0.50)(0.03) + (0.50)(0.18) = 0.105
(0.30)(0.03) + (0.70)(0.18) = 0.135
(0.10)(0.03) + (0.90)(0.18) = 0.165
(0.00)(0.03) + (1.00)(0.18) = 0.180
Risk
(b) Borrow an amount equal to 10% of his/her initial funds at the risk free interest rate to invest in the market portfolio:
Return
Risk
(c) Slope of the Capital Market line:
This slope tells us that for every unit (standard deviation) of risk taken on, the investor could be expected to receive a return of 2.5 points above the risk on the market portfolio.
Question 5 (Semester 1, 1998)
Expected return ($ 000’s)
From Present value of annuity tables where n = 5 and the interest rate is equal to 14:
Conversion factor = 3.4331. The present value of the cash flows is:
Therefore the net present value of the investment is:
$2,947,316 – 850,000= $2,097,316
The probability adjusted net present value is positive, therefore the project is worth undertaking.
Question 7 (Semester 2, 2007)
(a)
Company A:
Company B:
(b)
Company A’s characteristic line is –2.664 + 1.387rM. this indicates that over the 5 year period in
Question 4 (Semester 2, 2005)
96633337 Juan
(a) Expected Portfolio Return and Risk
Expected Return
Risk
Covariance = (0.002)(0.06)(0.09)=0.0000108
(b) Minimum Variance (Pendix Ltd)
The minimum variance for this portfolio is 0.693, indicating that risk is minimized when 69.3 percent of the portfolio is invested in Pendix’s shares. A rational investor would not allow Pendix’s shares to account for more than this proportion as they could get a higher return and lower risk by reducing Pendix’s shares below this amount. (A diagram here is helpful).
Question 5 (Semester 1,2007)
(a) Expected Return and Risk
(1.00)(0.03) + (0.00)(0.18) = 0.03
(0.70)(0.03) + (0.30)(0.18) = 0.075
(0.50)(0.03) + (0.50)(0.18) = 0.105
(0.30)(0.03) + (0.70)(0.18) = 0.135
(0.10)(0.03) + (0.90)(0.18) = 0.165
(0.00)(0.03) + (1.00)(0.18) = 0.180
Risk
(b) Borrow an amount equal to 10% of his/her initial funds at the risk free interest rate to invest in the market portfolio:
Return
Risk
(c) Slope of the Capital Market line:
This slope tells us that for every unit (standard deviation) of risk taken on, the investor could be expected to receive a return of 2.5 points above the risk on the market portfolio.
Question 5 (Semester 1, 1998)
Expected return ($ 000’s)
From Present value of annuity tables where n = 5 and the interest rate is equal to 14:
Conversion factor = 3.4331. The present value of the cash flows is:
Therefore the net present value of the investment is:
$2,947,316 – 850,000= $2,097,316
The probability adjusted net present value is positive, therefore the project is worth undertaking.
Question 7 (Semester 2, 2007)
(a)
Company A:
Company B:
(b)
Company A’s characteristic line is –2.664 + 1.387rM. this indicates that over the 5 year period in