Tutorial 6 (Questions)

Corporate Finance – BBA2103

1. The ordinary shares of Firm A have a Beta of 1.23. The risk-free rate of interest is 5 per
cent, and the risk premium achieved on the market index over the past 20 years has
averaged 11.5 per cent p.a. What is the future expected return on A’s shares? If you
believe that overall market returns will fall to 8 per cent in future years, how does your
answer change?

2. Supply the missing links in the table:

3. Which of the following shares are over-valued?

The risk-free rate is 5 per cent, and the return on the market index is 10 per cent.

4. Locate the Security Market Line (SML) given the following information: Rf = 8%,
E(Rm) = 12%.

5. The market portfolio has yielded 12% on average over past years. It is expected to offer
a risk premium in future years of 7%. The standard deviation of its return is 8%. The
risk-free rate is 5%.
(a) What is the expected return from the market portfolio ?
(b) Draw a diagramme to show the location of the capital market line (CML).
(c) What is the expected return on a portfolio comprising 50% invested in the
market portfolio and 50% invested in the risk-free asset ?
(d) What is the risk of the portfolio in (c) ?
(e) What is the market trade-off between portfolio risk and return suggested by
these figures ?