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Tutorial 6: FTX 3044F

Question 1 [11 marks]

You have just received a sum of R152 000 from an extremely wealthy relative as an
inheritance. You have no immediate use for the money and decide the right thing to do is
invest the money for 1 year to give you time to think about how it could be put to more
profitable use.
The investment option you are considering is the purchase of corporate bonds. The bonds
have a par value of R2000 and are selling at a discount of 5%. Over the coming year the
bonds will pay an interest of 7%. Your analysis has allowed you to scope the following
scenarios of potential interest rate movements and year-end bond price.
Interest Rates Probability Year-End Bond price
High 0.15 R1800
Unchanged 0.60 R1850
Low 0.25 R1950

You have also identified an opportunity to invest in treasury bills at a rate of return of 4%, but
opt for the bonds due to the better returns on offer.
1.1 Calculate the HPR for each scenario. [3 marks]
1.2 Calculate the Expected Return for the investment. [2 marks]
1.3 Suggest whether this bond investment is a wise decision given the certainty of a return of
4% on Treasury Bills. [5 marks]
1.4 Calculate the expected year end Rand value of the bond investment. [1 marks]
[Note: show all working in calculations]

Question 2 [11 marks]
You are evaluating performance of portfolios using the Sharpe Approach.
2.1 Given the data in table 1 below, how would you rank portfolios A, B and C relative to
each other. [4 marks]
2.2 Explain the ranking of your portfolios in 2.1[3 marks]
2.3 If given a chance to invest in any of portfolios A, B or C, suggest which option you would
chose if the information contained in table 2 is factored into your decision. [4 marks]
Table 1 Portfolio Return Risk Free Rate Portfolio Standard
Portfolio A 11.0% 6% 15%
Portfolio B 8.0% 6% 10%
Portfolio C 13.0% 6% 25%

Table 2 Market Return Risk Free Rate Portfolio Standard
Market 9.5% 6% 8%

[Note: show all working in calculations]

Question 3 [5 marks]
The diagram below is an illustration of the distribution of returns on portfolio D.
Comment on the appropriateness of the use of the standard deviation as a measure of risk
for portfolio D and the impact that this will have on the investors investment decision.
Question 4 [3 marks]
You would like to invest a sum of R10 000 for a period of 1 year. Indicate which of the
following options you would choose.
Option A: An investment with ABC Bank which guarantees a return of 0.5% per month.
Option B: An investment with XYZ Bank which guarantees an annual rate 6% per annum,
continuously compounded.
[Note: show all working in calculations]

[Total: 30 marks]