# FI6091_JR_(2) -Solution.doc - UNIVERSITY of LIMERICK...

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UNIVERSITYofLIMERICKO L L S C O I L L U I M N I G HDEPARTMENT OF ACCOUNTING & FINANCEKEMMY BUSINESS SCHOOLEND OF SEMESTER EXAMINATIONMODULE TITLE: Wealth & Portfolio ManagementMODULE CODE:FI6091SEMESTER:SpringACADEMIC YEAR:2013-2014PERCENTAGE OF TOTAL MARKS:70%DURATION OF EXAM: 2.5 hoursLECTURER(S):James RyanEXTERNAL EXAMINER:Prof. Don BredinINSTRUCTIONS TO CANDIDATES:Answer fourout of the following five questions.All questions carry equal marks.Marks will be awarded for neatness, clarity, and conciseness of answers.1
Question 1Part aYou are provided with the following information for two shares:Expected ReturnStandard DeviationCorrelation with marketShare A8.2%12%0.55Share B9.8%16%0.34The correlation between the two shares is 0.63 and the standard deviation of the market is 9%.RequiredCalculate the expected return and standard deviation for a portfolio consisting of 65% inShare A and 35% in Share B.(5 marks)B
Part bExplain what is meant by the term “correlation risk” in the context of assembling a diversifiedportfolio of risky securities.(4 marks)Part cThe Mean-Variance Efficient Frontier (MVEF) outlines the best possible combinations frominvesting in the feasible set of risky portfolios.Explain how introducing riskless borrowingand lending in conjunction with the MVEF leads to the Capital Market Line (CML).Whatare the implications of the CML?It may be useful to illustrate your answer graphically.(8 marks)Part dYou are provided with the following market information for the Irish market:2
Oil exploration stocks have an annual standard deviation of 24% and a correlation withthe ISEQ index of .36.The current yield on Irish Government 10-year bonds is 4.5%.The expected return on the ISEQ index is 10.7%.The ISEQ index has an annual standard deviation of 12.5%.Required1)Calculate the expected rate of return on oil exploration stocks?(3 marks)2)Show how you could construct a portfolio consisting only of the ISEQ index and 10-year Irish Government bonds that has the same expected return as the oil explorationstocks but has a lower overall standard deviation.Explain how it is possible for sucha portfolio to have a lower standard deviation than the oil exploration stocks while stillmaintaining the same level of expected return.(5 marks)Total 25 marks

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Term
Winter
Professor
mr rohit
Tags
Byron Hanley