1) Assume the Ghana Stocl market is expected to generate a return of 18%. Compan
ID: 2785703 • Letter: 1
Question
1) Assume the Ghana Stocl market is expected to generate a return of 18%. Company XYZ is listed on the GSE and its returns are consistently 20% more volatile than the market. Idf the risk free rate in Ghana is 12%, what is the required rate of return of XYZ? What is the risk premium on the stock XYZ
2) A pension fund's average monthly return for the year was 0.9 percent, and the standard deviation was 0.5percent. The fund uses an aggressive strategy as indicated by its beta of 1.7. If the market averaged 0.7 percent, with a standard deviation of 0.3 percent, how did the pension fund perform relative to the market? Assume the monthly risk free rate was 0.2 percent.
Explanation / Answer
1. Market return = 18%
Beta = 1 * (1+20%) = 1.20
Risk free rate = 12%
Required rate of return = risk free rate + beta * (market return - risk free rate)
Required rate of return = 0.12 + 1.2 * (0.18 - 0.12)
Required rate of return = 0.12 + 0.072
Required rate of return = 0.192
Required rate of return = 19.2%
Risk premium = beta * (market return - risk free rate)
Risk premium = 1.2 * (0.18 - 0.12)
Risk premium = 0.072 = 7.2%
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