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Kwame Nkrumah University of Science and Technololgy College of Arts and Social Sciences School of Business

This document contains sample questions and answers from a corporate finance strategies course. Question 4 provides calculations to determine the expected return and risk of two securities and a portfolio consisting of the two securities. Question 5 calculates the beta and expected returns of companies in a portfolio using the Capital Asset Pricing Model. Question 1 provides calculations for expected returns and risks of portfolios with varying compositions of two securities. Question 2 discusses an investor's optimal portfolio choice using the Capital Market Line.

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YAKUBU ISSAHAKU SAID
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60 views

Kwame Nkrumah University of Science and Technololgy College of Arts and Social Sciences School of Business

This document contains sample questions and answers from a corporate finance strategies course. Question 4 provides calculations to determine the expected return and risk of two securities and a portfolio consisting of the two securities. Question 5 calculates the beta and expected returns of companies in a portfolio using the Capital Asset Pricing Model. Question 1 provides calculations for expected returns and risks of portfolios with varying compositions of two securities. Question 2 discusses an investor's optimal portfolio choice using the Capital Market Line.

Uploaded by

YAKUBU ISSAHAKU SAID
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOLGY

COLLEGE OF ARTS AND SOCIAL SCIENCES


SCHOOL OF BUSINESS

PROGRAMME:
FULL TIME

MBA

COURSE TITLE:
CORPORATE
FINANCIAL
STRTEGY
COURSE CODE:
ACF

683

INDEX NUMBERS:
NAME OF STUDENT:

PG 3987115
ISSAHAKU YAKUBU SAID

Question 4.
[ai]

The expected return of a security, E (Rp) = (Pi x Ri)


For Security x, (x) = (30 x 0.3) + (25 x 0.4) + (20 x 0.3)
= 9 + 10 + 6 = 25%

For Security Y, (y) = (50 x 0.2) + (30 x 0.6) + (10 x 0.2)


= 10 + 18 + 2 = 30%
[aii]

the expected return of the portfolio of 60% of X and 40% of Y


E (Rp) = (Wx xRx) + (Wy x Ry) = (0.6x 25) + (0.4x 30) = 15 + 12 = 27%

[b]

Risk can be measured by the standard deviation of the returns.


Standard deviation () =

Pi x(R i x )2

For Security x
STANDARD DEVIATION OF X
Probabilit Return
y
(%)
(Ri ) Pi x(Ri - R)2
0.3
30
5
7.5
0.4
25
0
0
0.3
20
2.5
7.5
15

The expected risk or standard


deviation of X = 15 = 3.873%
For Security Y

STANDARD DEVIATION OF y
Probabilit Return
y
(%)
(Ri ) Pi x(Ri - )R)2
0.2
50
20
80
0.6
30
0
0
0.2
10
20
80
160

The expected risk or standard deviation of X =

160 = 12.6491%

Standard deviation of 60% X and 40% Y is


Using the portfolio theory expression for p as follows:

[(w x)2( x)2+(w y)2( y )2+2 w x w y x y p x , y ]


Or
p = [(wx)2(x)2 + (wy)2(y)2 + 2 wx wy x y px,y]1/2
p = [(0.62 x 15) + (0.42 x 160) + (2 x 0.6 x 0.4 x 3.873 x 12.649 x 0.15)]1/2

= [5.4 + 25.6 + 3.527]1/2 = 5.876%

Question 5.
(a). The portfolio beta is the weighted average of the individual security betas.
portfolio ( p )= [(w x) 2( x )2+(w y )2( y )2+ 2 w x w y x y p x , y ]

Share

No
Share
A

Share
price
B

Market
value
C= A x B

Beta
D

weighted Beta
E

Rasiak

70000 3.75

262,500.00

1.27

0.1697

Johnson

150000 4.25

637,500.00

1.53

0.4964

Smith

100000 2.50

250,000.00

1.01

0.1285

80000 4.50

360,000.00

0.95

0.174

130000 3.50

455,000.00

0.82

0.1899

1,965,000.0
0

5.58

Bisgaard
Idiakez

1.1585

Since the market portfolio is 1 and the Brown`s portfolio (p) =1.1585 or 1.6 which is greater the
market, the portfolio is riskier than the market.
b] To advice Brown plc. on the change in portfolio position, we need to compute the returns
using CAMP and compare the returns predicted by the CAPM with expected returns.
Using Rj% = Rf + j (Rm - Rf).

For Rasiak company, Rj% = 5 + 1.27(12 5) = 13.89%


For Johnson company, Rj% = 5 + 1.53(12-5) = 15.75%

The advice is that the expected returns in Rasiak and Bisgaard are less than those predicted by
their betas, meaning that they are underperforming and should be sale out.

Question 1.
The expected return of a portfolio is given as
E (Rp) = (Wx xRx) + (Wy x Ry) and
Standard deviation a portfolio is given as
portfolio ( p )= [(w x) 2( x )2+(w y )2( y )2+ 2 w x w y x y p x , y ] = p
a) When portfolio is i00% Z, E(Rp) = 15% ,
portfolio ( p ) = 20%
b) In the portfolio of 75 per cent Z and 25 per cent Y;
E(Rp) = (0.75 x 15) + (0.25 x 35) = 11.5 + 8.75 = 20.25%, and
p = [(0.75)2 x (20)2 + (0.25)2 x (40)2 + 2 x 0.75 x0.25 x 20 x 40 x 0.25]1/2
= [0.5625 x 400 +0.0625 x 1600 + 75]1/2 = [225 + 100 + 75]1/2
= 400 = 20%
c) In the portfolio of 50 per cent Z and 50 per cent Y;
E(Rp) = (0.5 x 15) + (0.5 x 35) = 7.5 + 8.75 = 17.5 = 25%, and
p = [(0.5)2 x (20)2 + (0.5)2 x (40)2 + 2 x 0.5 x0.5 x 20 x 40 x 0.25]1/2
= [0.25 x 400 + 0.25 x 1600 + 2 x 0.5 x0.5 x 20 x 40 x 0.25]1/2
= [ 100 + 400 + 100]1/2 = 600 = 24.49%
(a) In the portfolio of 25 per cent Z and 75 per cent Y;

E(Rp) = (0.25 x 15) + (0.75 x 35) = 3.75 + 26.25 = 30%, and


p = [(0.25)2 x (20)2 + (0.75)2 x (40)2 + 2 x 0.25 x0.75 x 20 x 40 x 0.25]1/2
= [0.0625 x 400 + 0.5625 x 1600 + 2 x 0.25 x0.75 x 20 x 40 x 0.25]1/2
= [ 25+ 900 + 75]1/2 = 100 = 31.622%
d) In the portfolio of 100 per cent Y. , E(Rp) = 35%, and
p = 40%.
Question 2.
Using the diagram attached, as a rational investor, the investor will reject portfolio on utility
curve U4 because it is out of the investor`s grasp. However, the investor will consider those
portfolio on utility curve U3 because of it tangency to the capital market line (CML) and locate
on point P by investing majority of his funds into the risk-free asset and the remainder in to the
market portfolio.

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