Tma from Wou

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Corporate Finance (BBF304)
TMA 1 (25%)
Total Marks: 100%

1. Given the following weighted market value of stocks in your portfolio and their expected rate of return, E(Ri), answer the following questions. (30 marks) Stock

Weighted Market Value
(%)

E(Ri)

Gamuda

14

- 0.05

Public Bank

37

0.12

Petronas

24

0.14

SapuraCrest

10

0.08

Celcom

15

0.06

(a)

W hat is the expected rate of return for your common stock portfolio? (6 marks)

(b)

Critically discuss why most investors hold diversified portfolio. (4 marks)

(c)

What is correlation, and explain why it is important in portfolio theory? (5 marks)

(d)

The capital asset pricing model (CAPM) contends that some risks are diversifiable, but others are not. Critically discuss what is the relevant risk variable considered in the CAPM? In your discussion, provide ONE (1) example for the relevant risk.

(10 marks)

2. What is the concept of Efficient Market Hypothesis (EMH)? Compare and contrast between three forms of Efficient Market Hypothesis (EMH) – weak, semi-strong, and strong forms. (10 marks)

3. Critically discuss TWO (2) evidence supporting and TWO (2) evidence against the Efficient Market Hypothesis (EMH). (10 mark)

4. There are three probable economic outcomes in the evaluation of stock A and B for the second half of 2012. Based on the following information, answer all the questions.(25 marks)
State of
Economy
Boom
Normal
Recession

Probability of State
of Economy
20%
50%
30%

Returns on stock A

Returns on stock B

8%
5%
2%

20%
12%
-10%

(a) What is the expected rate of return for stock A and B, respectively? (9 marks)
(b) W hat is the standard deviation for stock A and B, respectively? (9 marks)
(c) Assuming that stock A and stock B have beta of 0.8 and 1.6, respectively. The expected return of the market is 8% and the risk-free rate is 5%. W hat is the required return for stock A and B using Capital...
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