Investment Analysis Exam Paper

15. Investment A has an expected return of $25 million and investment B has an expected return of $5 million. Market risk analysts believe the standard deviation of the return A is $10 million, and for B is $30 million (negative returns are possible here).

The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the

a. Calculate the expected return over the 4-year period for each of the three alternatives.

With Reference to this statement, describe, discuss and illustrate the principles of portfolio theory. Your essay should include coverage of the Markowitz Efficient Frontier and the Capital Market Line.

2. (a) B and D are not minimum variance efficient portfolios. D is not efficient because

2. Which of the following statements about the efficient frontier is true? a) In practice, only the market portfolio is on the efficient frontier. b) The portfolios on the efficient frontier are only dominated by other portfolios on the efficient frontier. c) The efficient frontier tends to be concave. d) Several of the above statements are true. e) None of the above statements are true. The efficient frontier is a set of portfolios that minimize the standard deviation for their respective expected returns., so A is false. The portfolios on the efficient frontier are not dominated by any portfolios, so B is false. C is correct. Page 4 of 21 Please see over

29) An investor's risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true?

(a) The mean excess return, standard deviation, and portfolio weights for the minimum variance portfolio.

The interest rate of a term deposit is at 5.2% per annum. Available investment fund is $200,000. Term Deposit will yield $10,400 p.a. by using $200,000 multiply by 5.2%. However, for compounded interest rate, 5 years investment will be $257,697 (ROI = $57,697). And 10 years investment will be $332,038 (ROI = $132,038), assume that the interest rate is constant within 10 years period. The risk is considered minimal.

12. Please return the cost of capital to 9%. Sigma squared is the variance in the rate of return of the project. The calculations for the variance are in the first table of worksheet 2. Determining sigma squared is one of the most challenging tasks in calculating the value of a real option. In this example, we suggest asking managers for their best and worst case estimates of the benefits, given the expected benefits taken from worksheet 1. Just above the table, there is a percentage number for the range surrounding the expected returns, which starts at 20%. This says that the worst estimate is 80% of the expected, and the best is 120% of the expected.

In order to find the optimal portfolio allocation, the group needs to find the portfolio structured with lowest risk under a given return. This can be achieved by applying Mean-Variance Theory and Markowitz model find the efficient frontier, which yields the most optimal portfolio under given returns. It can be expressed in mathematical terms and solved by quadratic programming. [Appendix A]

7. How might you use this three asset optimal-allocation model to construct and graph an

d. What would be the investor 's certainty equivalent return for the optimally chosen combination? 2. Consider an investor who has an asset allocation of 50% in equities and the rest in T-Bills. Suppose the expected rate of return on equities is 10%/year and the standard deviation of the return on equities is 15%/year. T-Bills earn 6%/year. a. What is the implied risk aversion coefficient of the investor?

5. With respect to b), what would be the effect of the bondization and equitization overlay program on the expected return of the absolute return portfolio? Which contracts would be the most

Alex Sharpe should invest in Portfolio A, consisting of Reynolds and S&P500. Portfolio A gives higher return with lower risk. The standard deviation and the variance are both lower for portfolio A which means