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Tutorial 3 IFA

1. This document contains answers to multiple choice and essay questions about stocks, betas, and required rates of return. 2. It provides calculations to determine the betas, required rates of return, and expected returns for two stocks (Stocks A and B) based on their historical returns and market betas. 3. It also shows work to calculate the required rate of return for a bank (Public Bank) given its beta and the expected market return, finding it is a good investment since its actual return is higher than required.

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Eileen Wong
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247 views2 pages

Tutorial 3 IFA

1. This document contains answers to multiple choice and essay questions about stocks, betas, and required rates of return. 2. It provides calculations to determine the betas, required rates of return, and expected returns for two stocks (Stocks A and B) based on their historical returns and market betas. 3. It also shows work to calculate the required rate of return for a bank (Public Bank) given its beta and the expected market return, finding it is a good investment since its actual return is higher than required.

Uploaded by

Eileen Wong
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Tutorial 3

1. True
2. False. … and relates one security return to market return.
3. False. .. should attempt to decrease the overall beta of the portfolio.

Essay Questions:

1. Stock A

y = 0.7519x - 0.0151
Beta = 0.751

Stock B

Y = 1.4456x - 0.0576
Beta = 0.1445

2.

 Investors can compare


the expected return to
the required return
obtained from the
SML. It means that
those securities whose
expected return plot
above the SML are undervalued because they may offer more expected return
than investors required. If those securities whose expected return plot below
SML, means overvalued because they do not offer enough expected return for
their level of risk.

3. Beta = co.variance / m.variance


= 6% / 7%
= 0.8571

b. Stock A risk premium = Beta [ E(RM) -RF ]


= 0.8571 ( 8 -6 )
= 1.71%

c. Stock A required rate of return = RF + Bi [ E(RM) - RF ]


= 6 + 0.8571 (8-6)
= 7.71%

4. Ki = RF + Bi [ E(RM) - RF ]
= 3 + 1.16 (7-3)
= 7.64%

 Required return of Public Bank is 7.64%. As we know that PBB pays a return of
10% which higher than the required return. (10% > 7.64%) . It is a good
investment and investor can be encouraged to invest in PBB then hold other
factor constant.

5. Ki = RF + Bi [ E(RM) -RF ]
11 = 6 + Risk Premium
Risk Premium = 11 - 6 = 5%.

 We can see that the risk premium is 5%. Actually we can use the return of 6% as
risk free rate.
 The money still remain in EPF to obtain interest payment or invest into mutual
fund are based on the investors. EPF is an government entity in Malaysia which
had the minimal default risk compare to mutual fund.
 Not all mutual funds are safe investment.
 In my opinion, I would answered Yes, by saying that the fund is in low risk, and
the risk premium 5% is comfortable for me. I could be a risk taker and willing to
take risk to look for maximum return of 11%.
 It may be in different way if the answer is No. It can be saying that the fund is
high, then the risk premium is not attractive for them. They could be the risk
adverse investors and only focus on a certain outcome and not willing to take the
risk to look for the maximum return.

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