Module02Tutorial - July 2003 FIN2101 BUSINESS FINANCE II...

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July 2003 FIN2101 BUSINESS FINANCE II MODULE 2 – CAPITAL ASSET PRICING MODEL (CAPM) QUESTION 1 The best combination of expected value of return and standard deviation depends upon the investor's utility function. Explain this statement. QUESTION 2 Explain how the existence of a risk-free asset affects optimal portfolio selection. QUESTION 3 Explain briefly just what the Capital Asset Pricing Model tells us. QUESTION 4 Using the CAPM, estimate the appropriate required rate of return for the three shares listed below, given that the risk-free rate is 5% and the expected return on the market portfolio is 17%. Share Beta A 0.75 B 0.90 C 1.40 QUESTION 5 (a) Determine the expected return and beta for the following portfolio: Share Portfolio Weighting % Beta Expected Return % 1 40 1.00 12 2 25 0.75 11 3 35 1.30 15 (b) Given the information above, draw the security market line and show where the securities fit on the graph. Assume that the risk-free rate is 8% and that the expected return on the market portfolio is 12%. How would you interpret these findings?
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July 2003 QUESTION 6 In five successive time periods, the market portfolio had a return of 10%, 12%, 6%, -4% and 1%. A given security had the following returns over the same five time periods: 15%, 13%, 4%, -12% and –2%. Calculate: (a) the standard deviation of returns; (b) the correlation of returns between the market portfolio and the security; (c) the systematic risk of the security. QUESTION 7 Johnson Manufacturing Ltd is considering several investments. The rate on Treasury notes is currently 6.75% and the expected return for the market is 12%. What would be the required rates of return for each investment (using the CAPM)? Security
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This note was uploaded on 12/06/2011 for the course BUSINESS Finance taught by Professor Qilei during the Summer '11 term at Tianjin University.

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Module02Tutorial - July 2003 FIN2101 BUSINESS FINANCE II...

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