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Finance PDF

This document contains the references used in answering questions for a course assignment. It lists 4 references used, including journal articles and books on topics like supply chain risk management, futures markets, behavioral finance, and Weimar Germany. The references are formatted according to common academic styles with authors' names, publication years, titles, and sources listed.

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Amos Mwangi
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67 views7 pages

Finance PDF

This document contains the references used in answering questions for a course assignment. It lists 4 references used, including journal articles and books on topics like supply chain risk management, futures markets, behavioral finance, and Weimar Germany. The references are formatted according to common academic styles with authors' names, publication years, titles, and sources listed.

Uploaded by

Amos Mwangi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Student's Name

Department, Institutional Affiliation

Course Title

Professor’s Name

Date
QUESTION ONE

(i) Average Rate of Return = Total Return/ Number of years


YEAR Return ABC Return on Market Portfolio
2014 2.0% -12.0%
2015 13.0% 18.0%
2016 10.0% 5.0%
2017 5.0% 15.0%
2018 -8.0% 10.0%
2019 -2.0% 12.0%
2020 6.0% 26.0%
Total Return(A) 26.0% 74.0%
Number of years(B) 7 Years 7 Years
Average Return(A/B) 3.7% 10.6%

(ii) Standard Deviation

Year Return Return Return Return on (X) (Y) XY


ABC on ABC- Market
Market Average Portfolio-
Portfolio Return(X) Average
Return(Y)

2014 2.0 -12.0 -1.7 -22.6 2.9 510.8 38.4


2015 13.0 18.0 9.3 7.4 86.5 54.8 68.8
2016 10.0 5.0 6.3 -5.6 39.7 31.4 -35.3
2017 5.0 15.0 1.3 4.4 1.7 19.4 5.7
2018 -8.0 10.0 -11.7 -0.6 136.9 0.4 7.0
2019 -2.0 12.0 -5.7 1.4 32.5 2.0 -8.0
2020 6.0 26.0 2.3 15.4 5.3 237.2 35.4
305.5 856.0 112.0

a)
Satndard Deviation of ABC = √305.5/7 = 6.6%

b)
Satndard Deviation of Market = √856.0/7 = 11.06%

Covariance = 112.0/7 = 16.0%


vi) ABC Shares's Beta Coefficient.
Beta = Covariance/ Variance of Market Portfolio
= 16.0/122.3
= 0.13 times

v) Return = Rf+ Beta ( Market Return- Rf)


=4+ 0.13 (10.6-4)
=4.86%

Since required rate of return (4.9%) is more than Expected Return (3.7%) , therefore
Security is over priced

QUESTION TWO
i) Security Class. MARKET PORTFOLIO
A. (20/100)*100 = 20.0%
B. (20/100)*100 = 20.0%
C (30/100)*100 = 30.0%
D (30/100)*100 = 30.0%

S,D=((5*0.2)+(10*0.2)+(20*0.3)+(30*0.3))=11.045
ii)The Capital Market Line equation
RP=Rf+(Rm-Rf)*(SDp/SDm)
=Rf+(7-2)*(SDp/11.045)
Rp=Rf+(0453)*SDp

iii)ER=Rf+(Rm-Rf)*B
=Rf+(7-2)*B
ER=Rf+5ß
IV)f you wish to have expected return of 5% then you should invest in a stock that has the
following volatility;
5=2+5*beta
beta=3/5=0.6
if the expected return is 5 then the SD will be;
5=2+(0.453)*SDp
SDp=-3/0.453
=6.623
v) If you would like to have an expected return of 10 then;
10=2+5*beta
beta=7/5=1.4
For you to get an expected return of 6 then you need to invest in a portfolio that has volatility of
0.6
QUESTION THREE
Weights of A,B,C =Amount invested in each /Total investment
 Expected return on Portfolio = (Weight of A)(Expected Return of A)+(Weight of B)(Expected
Return of B)+ (Weight of C )(Expected Return of C)
=(10/100)(14%)+(8/100)(20%)+(7/100)(18%)
=0.1(14%)+0.08(20%+0.07(18%)
=1.4%+1.6%+1.26%
Expected return on Portfolio =4.26%
 Required return on Portfolio as per CAPM;
 CAPM return on a security = Risk Free Rate + Beta(Market return- Risk Free Rate)
CAPM return on A =5%+1.15(15%-5%)
CAPM return on A=5%+1.15(10%)
CAPM return on A=5%+11.5%
CAPM return on A=16.5%
CAPM return on B =5%+1.90(15%-5%)
CAPM return on B=5%+1.90(10%)
CAPM return on B=5%+19%
CAPM return on B=24%
CAPM return on C =5%+1.72(15%-5%)
CAPM return on C =5%+1.72(10%)
CAPM return on C =5%+17.2%
CAPM return on C =22.2%
 CAPSM Requuired return on Portfolio=(Weight of A)(CAPSM Return of A)+(Weight of B)
(CAPSM Return of B)+(Weight of C)(CAPSM Return of C)
=(10/100)(16.5%)+(8/100)(24%)+(7/100)(22.2%)
=0.1(16%)+0.08(24%+0.07(22.2%)
=1.6%+1.92%+1.55%
=5.07%
Expected Return on Portfolio=4.26%
CAPSM Required return on Portfolio=5.07%
Expected return< CAPSM Return
Therefore, a lower expected return is used as a discounting rate , which will lower down the
value of portfolio than its Instrinsic price.
So, the Portfolio is over-priced
QUESTION FOUR
i) Beta of the portfolio
Share Annual Return Beta Weighted beta
A 0.20 0.5 0.100
B 0.25 0.7 0.175
C 0.09 0.8 0.720
D 0.18 1.2 0.216
E 0.10 1.3 0.130
The beta of the portfolio= Sum of the weighted beta
=0.100+0.175+0.720+0.216+0.130
=1.341

ii)Systematic risk=*Variance of market index

1.341*0.25=0.11239

iii)Unsystematic risk

Share Specific risk X X


A 30 0 0
B 35 5 25
C 60 30 900
D 40 10 100
E 50 20 400
1425

1425/5=16.88

0.1688

iv)Total risk= Systematic risk + Unsystematic risk

=0.1124+0.1688

=0.2812

V)E(R)=Rf+beta*(Rm-Rf)

=5+1.341(14-5)

=17.069

vi)Sharpe=(Rp-Rf)/SDp

=(17.069-5)/16.88

=0.715
Treynor=(Rp-Rf)/Beta of the portfolio

=12.069/13.41

=0.9

Jansens Alpha=Rp-(Rf+Bp*(Rm-Rf)

=16.88-17.07

=-1.01

QUESTION FIVE
i) Beta of share A= Covariance of returns of share A/ Variance of market portfolio
=150/20

=0.375

ii)Expected Return on share A=Rf+ Beta ( Market Return- Rf)

=5+0.375(12-5)

=7.625%
References

A Norrman, A. W., 2020. The development of supply chain risk management over time:

revisiting Ericsson. Physical Distribution & Logistics Management..

V Kharbanda, A. S., 2018. Futures market efficiency and effectiveness of hedge in Indian

currency market. International Journal of Emerging Markets.

Weitz, E., 2018. Weimar Germany: promise and tragedy. s.l.:s.n.

Z Dickason, S. F., 2018. Establishing a link between risk tolerance, investor personality and

behavioral finance in South Africa. Cogent Economics & Finance.

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