Question

# Question 1 You are analysing Yachi Industries. It has a beta of 1.2. The expected return...

Question 1 You are analysing Yachi Industries. It has a beta of 1.2. The expected return on a market portfolio is 10%, and the risk free rate is 4%. a. What is the expected return of Yachi? (5’) b. If you want to diversify your investment risk, so you decide to invest 60% of your money in Yachi, and the rest of your money in a risk-free government bond. If you know the standard deviation of Yachi is 10%, what is your portfolio risk measured by standard deviation? (10’)

 As per Capital Asset Pricing Model Expected Return = RF + β(RM-RF) Given Information Risk free Return(RF) = 4% Return on Market Portfolio(RM) = 10% Beta(β) = 1.2 (a) As per Capital Asset Pricing Model Expected Return = RF + β(RM-RF) = 4% + 1.2 (10%-4%) = 11.2% (b) SD of Yachi (SD1) =10% SD of Risk free Investment will always be zero(0). Portfolio S.No Particulars Weight Return SD 1 Share in Yachi 60% 11.2% 10% 2 Risk free Bonds 40% 4% 0% SD of Portfolio = {(SD1*W1)^2 + (SD2W2)^2+2(SD1W1)(SD2W2)* COV(1,2)}^(1/2) = (60%*10%)^2 +(40%*0%)^2 + 2(0) = 6%

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