FIN10708 Finance and Investment for Business Topic 7 Tutorial Questions 1. Problem 8, p. 383 of the textbook = on excel document 2. Problem 9, p. 383 of the textbook. 0.72 x 0.1062+0.32 +0.15652+2.07 x 0.3 x 0.48 x 0.06 x 00.185 then square root 3. Using information in Questions 1 and 2 above:
(a) Calculate the portfolio’s returns in each of the years 2007 through to 2012
(b) Calculate the portfolio’s average annual return
(c) Calculate the portfolio’s standard deviation using your results from (a) and (b) and check that this standard deviation equals the one you calculate in Question 2 above. 4. Problem 16, p. 384 of the textbook.
5. A market analyst predicts that the expected return on the All Ordinaries Share Price Index will fall by 10% this year. Telstra has a beta of 0.51 and BHP Billiton has a beta of 1.17.
(a) What would you expect to happen this year to the return on an investment in (i) Telstra and (ii) BHP Billiton?
(b) If you accept the analyst’s prediction, should your investment portfolio contain shares with mainly high value or low value betas? 6. Problem 21, p. 385 of the textbook. 7. Problem 22, p. 385 of the textbook. 8. Problem 28, p. 385 of the textbook. 9. Company A has a beta of 0.7 and Company B has a beta of 1.4. If the risk-free rate is 4% and the market risk premium is 7%, according to the CAPM what is the expected return on an equally weighted portfolio of A and B? Show how this can be calculated in two different ways. A- 0.04+0.7x0.07 B- 0.04+1.4x0.07 Portfolio- 0.5x Result A+0.5X Result B Beta Portfolio= 0.5 x0.7 +0.5 x 1.4 Or 0.04 + beta x