Expected Portfolio Return and Risk

Topics: Investment, Modern portfolio theory, Capital asset pricing model Pages: 4 (691 words) Published: August 31, 2013
Suggested Answers to Previous Semesters Exam Questions

Question 4 (Semester 2, 2005)
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(a)Expected Portfolio Return and Risk

Expected Return


Covariance = (0.002)(0.06)(0.09)=0.0000108

(b)Minimum Variance (Pendix Ltd)

The minimum variance for this portfolio is 0.693, indicating that risk is minimized when 69.3 percent of the portfolio is invested in Pendix’s shares. A rational investor would not allow Pendix’s shares to account for more than this proportion as they could get a higher return and lower risk by reducing Pendix’s shares below this amount. (A diagram here is helpful).

Question 5 (Semester 1,2007)

(a) Expected Return and Risk

(1.00)(0.03) + (0.00)(0.18) = 0.03

(0.70)(0.03) + (0.30)(0.18) = 0.075

(0.50)(0.03) + (0.50)(0.18) = 0.105

(0.30)(0.03) + (0.70)(0.18) = 0.135

(0.10)(0.03) + (0.90)(0.18) = 0.165

(0.00)(0.03) + (1.00)(0.18) = 0.180


(b)Borrow an amount equal to 10% of his/her initial funds at the risk free interest rate to invest in the market portfolio:



(c)Slope of the Capital Market line:
This slope tells us that for every unit (standard deviation) of risk taken on, the investor could be expected to receive a return of 2.5 points above the risk on the market portfolio.

Question 5 (Semester 1, 1998)

Expected return ($ 000’s)

From Present value of annuity tables where n = 5 and the interest rate is equal to 14: Conversion factor = 3.4331. The present value of the cash flows is:

Therefore the net present value of the investment is:

$2,947,316 – 850,000= $2,097,316

The probability adjusted net present value is positive, therefore the project is worth undertaking.

Question 7 (Semester 2, 2007)

Company A:

Company B:


Company A’s characteristic line is –2.664 + 1.387rM. this indicates that over the 5 year period in...
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