UNIVERSITI TEKNOLOGI MARA

TEST 1

COURSE : CORPORATE FINANCE

COURSE CODE : MAF603

DATE : NOVEMBER 2023

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of one (1) question.

2. Submission is due on 19 November 2023

3. Your answer must be handwritten.

QUESTION

The Finance Manager of Indah Bhd proposes two risky securities for investment consideration
currently traded on the stock exchange. The following information relates to the securities of
Taurus Bhd and Virgo Bhd, in different economic conditions.

State of economy Recession Normal Boom

Probability 0.30 0.40 0.30
Estimated return (%)
Taurus Bhd -12 13 18
Virgo Bhd 11 10 8

Additional information:

The treasury bill yield and the market's expected returns is 5% and 13%, respectively.
The correlation between security Taurus Bhd and Virgo Bhd is -0.82.

Required:

i. Calculate the expected return and standard deviation of each security Taurus Bhd
and Virgo Bhd.

ii. Calculate the expected return and standard deviation for the following alternative
portfolio below:

a) 60% in Taurus Bhd and 40% in Virgo Bhd

b) 50% in Taurus Bhd and 50% in Virgo Bhd
c) 90% in Taurus Bhd and 10% in Virgo Bhd

iii. Based on your answers in (ii) above, which alternatives would you choose? Explain
your recommendation.

iv. Assuming the CAPM holds and security Taurus Bhd's beta is 1.2 and security Virgo
Bhd's beta is less than security Taurus Bhd's beta by 0.3. Calculate the following: -

a) Beta for all portfolios available in (ii).

b) Required return for all portfolios available in (ii).

v) Evaluate whether all portfolios available are correctly priced or otherwise.

vi) Advise the good choice of investment for Indah Bhd. Explain your answer.

(50 marks)

(CALCULATE YOUR ANSWER IN TWO DECIMAL PLACES)

GOOD LUCK