Tut7_2009+Sols - BUS3026W Finance II 2009 - Tutorial 7...

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BUS3026W Finance II 2009 - Tutorial 7 Solutions ______________________________________________________________ Question One a. E(R) = 6 + 1.2 (6) + 0.5 (8) + 0.3 (3) = 6 + 7.2 + 4 + 0.9 = 18.1% b. r i = E(R) + β I x I + β IP x IP + β OP x OP = 18.1 + (1.2 x -1) + (0.5 x 3) + (0.3 x -2) = 18.1 – 1.2 + 1.5 – 0.6 = 17.8% Question Two a. 2 2 M 2 2 R σ σ β = For A: 0.2 = 0.7 2 x 0.2 2 σ 2 σ 2 = 0.098 Therefore standard deviation is 31.3% For B: 0.12 = 1.2 2 x 0.2 2 σ 2 σ 2 = 0.48 Therefore standard deviation is 69.3% b. For A: Systematic variance is: β 2 σ 2 M = 0.7 2 x 0.2 2 = 0.0196 Therefore the systematic component of risk is 14%. (Deviation) σ 2 = β 2 σ 2 M + σ 2 (e) Therefore σ 2 (e) = 9.8 – 1.96 = 0.0784 The unsystematic component of risk is 28%. (Deviation) Please note that the variances of the two risks are additive. The standard deviations are not (14% + 28% ≠ 31.3%).
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This note was uploaded on 06/01/2011 for the course FIN 3026W taught by Professor Drtoerien during the Summer '09 term at University of Cape Town.

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Tut7_2009+Sols - BUS3026W Finance II 2009 - Tutorial 7...

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