a) You currently have all of your £1,000,000 wealth invested in an aggressive portfolio of UK stocks which has a beta o
Posted: Wed May 18, 2022 9:34 pm
a) You currently have all of your £1,000,000 wealth
invested in an aggressive portfolio of UK stocks which has a beta
of 1.3. You are concerned that this is too risky a position. You
can also invest (both long and short) in a defensive UK stock
portfolio which has a beta of exactly 0.3. You wish to re-allocate
your wealth so that some is invested in the aggressive portfolio
and the rest in the defensive portfolio and so that your overall
beta is 0.5. What are your portfolio weights on the aggressive
asset and the defensive asset?
(10 marks)
b) A market consists of only two stocks, X and Y. The
market cap of X is $3bn and that of Y is $7bn. X has an expected
return of 10% and a return standard deviation of 32%. Y has an
expected return of 8% and a standard deviation of 20%. Their return
correlation is 0.25.
i) What is the expected return on the market and the return
standard deviation of the
market?
ii) What are the CAPM betas of X and Y?
(10 marks) (10 marks)
c) Assume that you believe in the Capital Asset Pricing Model.
You believe that you have, through extensive research, identified a
stock that plots below the Security Market Line. What
does this imply for whether or not it is fairly priced? How would
you exploit this situation? [Write no more than 5 sentences in your
answer.]
(10 marks)
invested in an aggressive portfolio of UK stocks which has a beta
of 1.3. You are concerned that this is too risky a position. You
can also invest (both long and short) in a defensive UK stock
portfolio which has a beta of exactly 0.3. You wish to re-allocate
your wealth so that some is invested in the aggressive portfolio
and the rest in the defensive portfolio and so that your overall
beta is 0.5. What are your portfolio weights on the aggressive
asset and the defensive asset?
(10 marks)
b) A market consists of only two stocks, X and Y. The
market cap of X is $3bn and that of Y is $7bn. X has an expected
return of 10% and a return standard deviation of 32%. Y has an
expected return of 8% and a standard deviation of 20%. Their return
correlation is 0.25.
i) What is the expected return on the market and the return
standard deviation of the
market?
ii) What are the CAPM betas of X and Y?
(10 marks) (10 marks)
c) Assume that you believe in the Capital Asset Pricing Model.
You believe that you have, through extensive research, identified a
stock that plots below the Security Market Line. What
does this imply for whether or not it is fairly priced? How would
you exploit this situation? [Write no more than 5 sentences in your
answer.]
(10 marks)