Question

In: Finance

An investor has the following portfolio of three shares. However, the amount invested in SYD is...

An investor has the following portfolio of three shares. However, the amount invested in SYD is not supplied. The investor owns 4,000 SYD shares that are currently trading at $2.50 each. Each share is priced in equilibrium. Government bonds have a current yield of 5% p.a.

Company	Expected Return	Amount Invested	Beta
SYD	11.63%	???	0.68
BKK	17.09%	$15,000	1.24
LHR	22.55%	$5,000	1.8

(a) What is the expected return of the portfolio?

(b) What is the risk of the portfolio?

(c) Calculate the market risk premium.

(d) The investor is considering the purchase of another share, LAX, that has a current return of 19.25%. If LAX has a beta of 1.4, are LAX shares overpriced, underpriced or fairly priced? Explain

Important: Please explain your calculations. Please show your calculations thoroughly. Please show formulas and calculations clearly. Please do not use excel.

Expert Solution

Amount invested in SYD = No of share * Price = 4000 * 2.50 = 10000

First Find weight of each investment. It is calculated by

Investment in a Security / Total AMount Invested

	Amount Invested	Weight
SYD	10000	0.3333
BKK	15000	0.5000
LHR	5000	0.1667
Total	30000

a. 16.18%

Expected Return = Return from a Security * Weight ie.

Ret syd*weight syd + Ret BKK*weight BKK + Ret LHR*weight LHR

Company	Expected Return	Weight	Expected Ret*Weight
SYD	11.63%	0.3333	3.88%
BKK	17.09%	0.5000	8.55%
LHR	22.55%	0.1667	3.76%
		Total	16.18%

b. Risk of Portfolio = Weighted Beta = 1.1467%

i.e Beta syd*weight syd + Beta BKK*weight BKK + Beta LHR*weight LHR

Company	Beta	Weight	Expected Ret*Weight
SYD	0.68%	0.3333	0.2267%
BKK	1.24%	0.5000	0.6200%
LHR	1.80%	0.1667	0.3000%
		Total	1.1467%

c. Market Premium = 9.75%

According to CAPM

Retrn Expected = Risk free Return + Beta (Market Return Premium)

5 + 0.68*Market Premium = 11.63

Market Premium = (11.63 - 5) / 0.68 = 9.75%

d. For LAX share expected return as per CAPM would be

= 5 + 1.4*9.75 = 18.65%

But the return is 19.25%. so the share is underpriced as actual return is higher than CAPM Return

jeff jeffy answered 1 year ago

An Investor has $200,000 invested in a 2-stock portfolio. $60,000 is invested in Stock X and...

An Investor has $200,000 invested in a 2-stock portfolio. $60,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.2 and Y’s beta is 1.5. What is the portfolio's beta?

Given an investor in Europe, with a EUR denominated portfolio base currency, that has invested in...

Given an investor in Europe, with a EUR denominated portfolio base currency, that has invested in a USD denominated corporate bond issued by a firm in Japan, identify the types of risk exposures to the investor. Would there by any additional/changed exposures if the issuing firm had a poor credit rating? Why or why not?

An English institutional investor has invested in a portfolio of stocks in Russia. The annual inflation...

An English institutional investor has invested in a portfolio of stocks in Russia. The annual inflation rate is 6 percent in Russia and 2.5 percent in the England. Suppose that the annual return on the portfolio is 12 percent in Russian rubles, and the Russian ruble depreciated with respect to the pound by 5 percent. Also suppose that a Russian institutional investor also held a portfolio with the same composition. Compare the real returns for both investors, and discuss why...

Kelly has investments with the following characteristics in her portfolio: Investment In Beta Amount Invested Stock...

Kelly has investments with the following characteristics in her portfolio: Investment In Beta Amount Invested Stock Q 1.2 $10,000 Stock R 2.1 $20,000 Stock S 0.89 $20,000 Given the risk free rate of 3% and the market return of 8%, what is the expected rate of return of Kelly’s investment portfolio?

Consider an investor with a 3 asset portfolio. Fifty percent of the investor’s portfolio is invested...

Consider an investor with a 3 asset portfolio. Fifty percent of the investor’s portfolio is invested in common stock with an expected return of 11%, an additional thirty percent of the investor’s portfolio is invested in corporate bonds with an expected return of 6%, while the remaining twenty percent of the portfolio in invested in real estate which offers an expected return of 14%. The standard deviation of return for the three individual investments are 23%, 9%, and 32% respectively....

The following information is for the next three questions. Investor P has the following portfolio: Stock...

The following information is for the next three questions. Investor P has the following portfolio: Stock Amount Return Beta A 10,000 10% 1.2 B 30,000 12% 0.8 C 20,000 15% 1.4 D 40,000 20% 2.0 01 - What are the weights of these four stocks in the portfolio? A. w1= 20%, w2= 30% w3 = 20% w4= 10% B. w1= 10%, w2= 40% w3 = 20% w4= 10% C. w1= 10%, w2= 30% w3 = 20% w4= 40% D. w1=...

An entrepreneur has 2000 shares. An angel invested $1000 for 1000 shares. A new investor would have...

An entrepreneur has 2000 shares. An angel invested $1000 for 1000 shares. A new investor would have been willing to invest $500 for 1000 shares if there were no ratchet in the first round (a price of $0.50) per share. So the total value of the venture is $2000 and the new investor would own 25% of the value. At what price per share would the new investor be willing to invest if the first-round investor has a full ratchet?

A money manager is holding the following portfolio: Stock Amount Invested Beta &nbs

A money manager is holding the following portfolio: Stock Amount Invested Beta 1 $400,000 1.00 2 600,000 0.85 3 300,000 1.20 4 500,000 0.50 5 200,000 1.70 The risk-free rate is 7 percent and the portfolio’s required rate of return is 13.975 percent. The manager would like to sell all of her holdings of Stock 4 and use half the proceeds to purchase more shares of Stock 5, and the other half of...

The table below gives the amount invested and betas for three stocks. Stock Amount Invested...

The table below gives the amount invested and betas for three stocks. Stock Amount Invested Beta GM K10, 000 1.2 IBM K10, 000 1.0 WMT K20, 000 0.7 REQUIRED: Using the CAPM, if the expected return for the market is 6% and the risk-free rate is 1.5%, what is the expected return for each stock? What is the beta for this portfolio based on the invested amounts? Using the CAPM, what...

A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free...

A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free Treasury bills. Show how each of the following events will affect the investor’s budget line and proportion of stocks in her portfolio: A. The standard deviation of the return on the stock market increases, but the expected return on the stock market remains the same. B. The expected return on the stock market increases, but the standard deviation of the stock market remains the...