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  • Solution Test 1 - Novemeber 2022

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    Hadi Dahalan
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    This document provides calculations and analysis for different investment portfolios. It compares the expected return, standard deviation, covariance, beta, and required return based on CAPM for portfolios with different allocations of securities Yumi and Zess. It determines that both a 60% Yumi / 40% Zess portfolio and a 30% Yumi / 70% Zess portfolio are underpriced according to their expected returns and required returns. It recommends the 60% / 40% portfolio as slightly more attractive since it has a larger difference between its expected return and required return.

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    test 1 maf603

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    This document provides calculations and analysis for different investment portfolios. It compares the expected return, standard deviation, covariance, beta, and required return based on CAPM for portfolios with different allocations of securities Yumi and Zess. It determines that both a 60% Yumi / 40% Zess portfolio and a 30% Yumi / 70% Zess portfolio are underpriced according to their expected returns and required returns. It recommends the 60% / 40% portfolio as slightly more attractive since it has a larger difference between its expected return and required return.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    19 views2 pages

    Solution Test 1 - Novemeber 2022

    Uploaded by

    Hadi Dahalan
    This document provides calculations and analysis for different investment portfolios. It compares the expected return, standard deviation, covariance, beta, and required return based on CAPM for portfolios with different allocations of securities Yumi and Zess. It determines that both a 60% Yumi / 40% Zess portfolio and a 30% Yumi / 70% Zess portfolio are underpriced according to their expected returns and required returns. It recommends the 60% / 40% portfolio as slightly more attractive since it has a larger difference between its expected return and required return.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 2

    SOLUTION TEST 1

    MAF603
    AUG 2022 – FEB 2023

    Question

    a) Expected Return
    Yumi : 0.35 (19) + 0.40 (28) + 0.25 (23) √√√

    = 23.6%

    Zess : 0.35 (31) + 0.40 (20) + 0.25 (17) √√√

    = 23.1%

    Standard deviation (SD)

    Yumi : √0.35 (19 – 23.6) 2 + 0.40 (28 – 23.6) 2 + 0.25 (23 – 23.6)2 √√√

    SD = √15.24
    = 3.9%

    Zess : √0.35 (31 – 23.1) 2 + 0.40 (20 – 23.1) 2 + 0.25 (17 – 23.1) 2 √√√

    SD = √34.99
    = 5.9%

    Advice : En. Darus should choose to invest in security Yumi √ because it gives the
    lower risk √ and higher return. √

    √15
    b) Covariance

    0.35√ (19 – 23.6) (31 – 23.1) √ = -12.719


    + 0.40 √ (28 – 23.6) (20 – 23.1) √ = -5.456
    + 0.25√ (23 – 23.6) (17 – 23.1) √ = 0.915
    --------------
    = -17.26

    √6
    c) Expected Return and Standard Deviation of Portfolio

    Expected Return

    0.6 (23.6) + 0.4 (23.1) √√√√

    = 23.4%
    Standard deviation

    √ (0.6)2 √ (3.9)2√ + (0.4)2 √ (5.9)2 √+ 2 (0.6) (0.4) √ (-17.26) √

    = √2.7604

    = 1.7%
    √10

    d) Required Return for Portfolio (60%:40%)

    Beta portfolio = 0.6 (1.6) + 0.4 (1.8) √√


    = 1.68

    Required Return for portfolio

    = 4 √ + 1.68 (7.5 - 4) √√
    = 9.88%
    √5

    e) Required Return for Porfolio (30%:70%)

    Beta portfolio = 0.3 (1.6) + 0.7 (1.8) √√


    = 1.74

    Required Return for portfolio

    = 4 √ + 1.74 (7.5 - 4) √√
    = 10.09%
    √5

    f) Which portfolio would be a better investment

    Expected Return

    0.3 (23.6) + 0.7 (23.1) √√√√

    = 23.3%

    Portfolio Expected Required Evaluation Investment


    return return (CAPM) Decision
    60%:40% 23.4% 9.88% Underpriced√ Buy
    30%:70% 23.3% 10.09% Underpriced√ Buy

    Both portfolios are not correctly priced√ . Both are underpriced. The best portfolio is 60%:40%√
    because the difference between expected return and required return is higher. √
    √9

    50 marks

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