Condition of economy Probability Grn Bond Atl Ltd Zam Ltd Lsk Ltd Market Portfol

Question

Condition of economy

Probability

Grn Bond

Atl

Ltd

Zam

Ltd

Lsk Ltd

Market

Portfolio

Portfolio of Atl Ltd & Zam Ltd

Recession

0.1

8.0%

-22%

28%

10%

-13%

(E)

Below average

0.2

8.0%

-2%

14.7%

-10%

1%

(E)

Average

0.4

8.0%

20%

0%

7.0%

15%

(E)

Above average

0.2

8.0%

35%

-10%

45%

29%

(E)

Boom

0.1

8.0%

50%

-20%

30%

43%

(E)

Expected

Return

-

(A)

(A)

(A)

(A)

(A)

(E)

Standard

Deviation

-

(B)

(B)

(B)

(B)

(B)

(E)

Coefficient of

Variation

-

(C)

(C)

(C)

(C)

(C)

(E)

Beta

-

(D)

1.29

-0.86

0.68

(D)

(E)

Required Return

-

(F)

(F)

(F)

(F)

(F)

-

QUESTION ONE

Is the government bond’s return independent of the condition of the economy? Validate your answer                                                                                                                                                                                 

QUESTION TWO

Calculate the expected return for each of the above five alternatives. Fill in the answers in the spaces marked (A). Show your calculations or explanations. From your calculations which alternative would you select as an investor?                                                                                                                                       

QUESTION THREE

Calculate the standard deviation for each of the above five alternatives. Fill in the answers in the spaces marked (B). Show your calculations or explanations. From your calculations which alternative would you select as an investor?                                                                                                                                        [15 MARKS]

QUESTION FOUR

Calculate the coefficient of variation for each of the above five alternatives. Fill in the answers in the spaces marked (C ). Show your calculations or explanations. From your calculations which alternative would you select as an investor?

QUESTION FIVE

Calculate the beta coefficient for government and the market portfolio. Fill in the answers in the spaces marked (D). Show your calculations or explanations.

QUESTION SIX

You decide to create a portfolio consisting of Atl Ltd and Zam Ltd investing K50 000 in each asset. Calculate the expected return, standard deviation, beta and coefficient of variation for the portfolio. Fill in the answers in the spaces marked (E). Show your calculations and explanations.

QUESTION SEVEN

Using the beta coefficients calculate the required rate of return of each of the five alternatives. Fill in the answers in the spaces marked (F). Show your calculations and explanations.   

QUESTION EIGHT

Utilise your answers for the expected returns (A) and required return (F) to plot the Security Market Line. Clearly show weather each alternative asset is under-valued, over-valued or fairly valued.                                                                                       

Condition of economy

Probability

Grn Bond

Atl

Ltd

Zam

Ltd

Lsk Ltd

Market

Portfolio

Portfolio of Atl Ltd & Zam Ltd

Recession

0.1

8.0%

-22%

28%

10%

-13%

(E)

Below average

0.2

8.0%

-2%

14.7%

-10%

1%

(E)

Average

0.4

8.0%

20%

0%

7.0%

15%

(E)

Above average

0.2

8.0%

35%

-10%

45%

29%

(E)

Boom

0.1

8.0%

50%

-20%

30%

43%

(E)

Expected

Return

-

(A)

(A)

(A)

(A)

(A)

(E)

Standard

Deviation

-

(B)

(B)

(B)

(B)

(B)

(E)

Coefficient of

Variation

-

(C)

(C)

(C)

(C)

(C)

(E)

Beta

-

(D)

1.29

-0.86

0.68

(D)

(E)

Required Return

-

(F)

(F)

(F)

(F)

(F)

-

Explanation / Answer

Condition of economy Probability Grn Bond Atl Ltd Zam Ltd Lsk Ltd Market Portfol

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