Investment Analysis 2024/2025 Academic Year
Seminar Discussion Questions & Review Questions
Portfolio Management
1. You own a portfolio equally invested in a risk-free asset and two equities. If one of
the equities has a beta of 1.38 and the total portfolio is equally as risky as the market,
what must the beta be for the other equity in your portfolio?
2. Equity Y has a beta of 1.4 and an expected return of 18.5 per cent. Equity Z has a
beta of 0.80 and an expected return of 12.1 per cent. If the risk-free rate is 2 per cent
and the market risk premium is 7.5 per cent, are these equities correctly priced? If
not, what would the risk-free rate have to be for the two equities to be correctly
priced?
3. The risk free rate is 4%, and the required return on the market is 12%.
a. What is the required return on an asset with a beta of 1.5?
b. What is the reward/risk ratio?
c. What is the required return on a portfolio consisting of 40% of the asset above
and the rest in an asset with an average amount of systematic risk?
4. The return on T-Bills considered as closest substitute for the risk free rate of
return is 6%. The expected return on the market index is estimated to be 14%.
A portfolio manager has short-listed for inclusion in the portfolio
Investm Sleepw Eatw Livew Runw Stylew Lookw
ent ell ell ell ell ell ell
Beta 0.85 1.15 1.25 1.65 0.95 1.45
What is the expected return of each of the investment as per CAPM?
If an investor wants to constitute a portfolio by the following proportions
Sleepwell 15% Runwell 30%
Eatwell 20% Stylewell 5%
Livewell 10% Lookwell 20%
What would be the returns on the portfolio?
Also find its beta and expected return using CAPM and the beta so arrived.
5. Given the following information for 5 short-listed securities and the returns of
T-bills and market index
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Security Exp Return, % β σ%
A 25.00 1.65 54
B 27.00 1.35 42
C 24.00 1.15 35
D 18.00 0.95 22
E 16.00 1.12 25
Market Index 15.00 1.00 22
T-bill 5.50 0.00 00
(a) For equally weighted portfolio of five securities, find the following:
(i) Return (ii) Beta (iii) Systematic risk
(iv) Unsystematic risk (v) Total risk
(b) What would happen to the risk and return if the investor borrows 50% at
the risk-free rate and invests in the same portfolio?
6. You want to create a portfolio equally as risky as the market, and you have TZS
1,000,000 to invest. Given this information, fill in the rest of the following table:
ASSET INVESTMENT (TZS) BETA
A 210,000 0.85
B 320000 1.2
C 1.35
Risk-Free
Asset
7. Consider the following information about Equities I and II:
Rate of Return if state
Probability of state occurs
State of Economy of Economy Equity I Equity II
Recession 0.25 0.11 -0.40
Normal 0.50 0.29 0.10
Irrational
exuberance 0.25 0.13 0.56
The market risk premium is 8 per cent, and the risk-free rate is 4 per cent.
Which equity has the most systematic risk? Which one has the most
unsystematic risk? Which equity is ‘riskier’? Explain.
Note:
Seminar Discussion Questions are in Bold
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