An investor is seeking the price to pay for a security, whose standard deviation is 3.00 per cent. the correlation coefficient for the security with the market is 0.8 and the market standard deviation is 2.2 per cent. The return from Government securities is 5.2 per cent and from the market portfolio is 9.8 per cent. The investor kas that, by calculating the required return, he can then determine the price to pay for the security. What is the required return on the investment?

The following information is given:

Risk-free rate of return 8%

Expected rate of return on market portfolio 16%Beta (ᵝ)of a security 0.7

(a)Find out the expected rate of return of the security.

(b)If another security has an expected return of 20%, what must be its beta?

Calculate the expected rate of return of the security and interpret the same from the following information:

Calculate the market sensitivity index and the expected return on the portfolio from the following data:Standard deviation of an asset Market 2.5%Standard deviation of security 2.0%Risk-f ree ra te of re turn 13%Expected return on market portfolio 15%Correlation coefficient of portfolio with market 0.8(a) what will be the expected return on the portfolio if portfolio beta is 0.5 and the risk-free return is

The market portfolio has a historically based expected return of 0.095 and a standard deviation during a period when risk-free assets yielded 0.025. The 0.06 risk premium is thought to be constant through

A Ltd. has an expected return of 22% and Standard deviation of 40%. B Ltd. has an expected return of 24% and Standard deviation of 38%. A Ltd. has a beta of 0.86 and B Ltd. a beta of 1.24. The correlation coefficient between the return of A Ltd. and B Ltd. is 0.72. The Standard deviation of the market return is 20%. Suggest:Is investing in B Ltd. better than investing in A Ltd.? a) If you invest 30% in B Ltd. and 70% in A Ltd., what is your expected rate of return and

portfolio Standard deviation?b) What is the market portfolios expected rate of return and how much is the risk-free rate?

c) What is the beta of Portfolio if A Ltd.'s weight is 70% and B Ltd.'s weight is 30%?

d) The expected return of B Ltd. is 24% as compared to 22% of A Ltd.e) The Standard deviation of B Ltd. is 24% as compared to 40% of A Ltd.f) In view of the above, A Ltd. has lower return and carries higher risk as compared to B Ltd.

Hence, investing in B Ltd. is better than investing in A Ltd. But investing in both A Ltd. and B Ltd. will cause to yield the advantage due to diversification of portfolio.

A project had an equity beta of 1.2 and was going to be financed by a combination of 30% debt and 70% equity. Assuming debt-beta to be zero; calculate the project beta taking risk-free rate of

return to be 10% and return on market portfolio at 18%.

Following is the data regarding six securities :

A B C D E

Return (96) 8 8 12 4 9

Risk (%) 4 5 12 4 5

(Standard Deviation)

(I) Which of the securities will be selected ?(it) Assuming perfect correlation, analyse whether it is preferable to invest 75% in Security A and Security C.

The total market value of the equity share of O.R.E. Company is Rs. 60,00,000 and the total of the debt is Rs. 40,00,000. The treasurer estimate that the beta of the stock is currently 1.5 and that the expected premium on the market is 10 per cent. The treasury bill rate is 8 per cent.

Required:

1. What is the beta of the Company's existing portfolio of assets ?Estimate the Company's Cost of capital and the discount rate for an expansion of the company's

business.

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Beta of Company's existing portfolio of assetsE

D + E °D X D + E

C.Et,Beta of company assets

Beta of Equity i.e. 1.5

Beta of Debt (since company's debt capital is risk less, its Beta is zero)

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Value of Equity i.e. Rs. 60,00,000 Value of Debt i.e. Rs. 40,00,000 Total value of the company

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