Question

# QUESTION 1 Given the world economic outlook for the coming years, following information are available for...

QUESTION 1

Given the world economic outlook for the coming years, following information are available for GlaxoSmithKline, a pharmaceutical company in Australia.

 Probability Possible Return 0.1 -0.2 0.15 -0.75 0.2 0.2 0.25 0.15 0.3 0.34

Compute the expected return of GlaxoSmithKline. (please keep 2 decimal points in your working)

QUESTION 2

An investor expects the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. He also has the following information about three stocks.

d d

 Stock Beta Current Price Expecte Price d Expecte Dividen

A 1.25 \$20 \$23

B 1.50 \$27 \$29

C 0.90 \$35 \$38

What are the expected (required) rates of return for the three stocks?

What are the estimated rates of return for the three stocks?

Which stock is considered under/over-valued?

\$1.25 \$0.25 \$1.00

RMIT University, BAFI1042

Page 1 of 2

QUESTION 3

Poli Advisory Ltd has offered two stocks for Harry Louis to invest. The historical annual returns are provided below for risk-return analysis.

 Year Stock 1 Stock 2 1 5.25 -0.58 2 4.8 7.75 3 -1.5 3.01 4 3.94 -2.25 5 10.05 14.63 6 -2.36 5.45

What is the expected return for each stock.

Given Harry is a risk-adverse investor, which stock should he invest?

Advise the diversification benefit (if possible) of those two assets’ return correlation since Harry

wants to use both to construct his portfolio.

 1 Probability Possible Return Expected Return A B C = A x B 0.1 -0.2 -0.02 0.15 -0.75 -0.1125 0.2 0.2 0.04 0.25 0.15 0.0375 0.3 0.34 0.102 Total Expected Return 0.05 2 Expected Return Estimated Return A 3% + 1.25 x (8%-3%) = 9.25% (23-20)÷20 = 15% Undervalued B 3% + 1.5 x (8%-3%) = 10.50% (29-27)÷ 27 = 7.41% Overvalued C 3% + 0.9 x (8%-3%) = 7.50% (38-35)÷ 35 = 8.57% Undervalued Decision: Est. Return > Exp return = undervalued Est. return < exp return = Overvalued

#### Earn Coins

Coins can be redeemed for fabulous gifts.