Question

1. If you were to deposit $12,000 today in a 1-year term deposit account earning 6% p.a. compounded annually, approximately how much will be your real gain at maturity if the inflation rate in the same year is 0.5%?
2. ABC Ltd. and XYZ Ltd. shares have betas of 0.8 and 1.2 respectively. Government bills currently yields at 4% and the market risk premium is 6%. What is the expected return on XYZ Ltd. shares?

Answer 1

Your real gain as per Purchasing Power parity will be the earning yield - Inflation rate.

So the Net Gain will be = 12,000 * (Interest On term Deposit - Inflattion Rate)

= 12,000 * (5.5%)

= 660

Your Real gain will be $660

As per CAPM, the expected Return on XYZ will be =Risk-Free rate + Beta ( Market Return - Risk-Free Rate)

Market Risk Premium = ( Market Return - Risk-Free Rate)

4 + 1.2 (6)

= 11.2

The expected return is 11.2%

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