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Corporate Finance (BBF304) TMA 1 (25%) Total Marks: 100% 1. Given the following weighted market value of stocks in your portfolio and their expected rate of return, E(Ri), answer the following questions. (30 marks) Stock Weighted Market Value (%) E(Ri) Gamuda 14 - 0. 05 Public Bank 37 0. 12 Petronas 24 0. 14 SapuraCrest 10 0. 08 Celcom 15 0. 06 (a) W hat is the expected rate of return for your common stock portfolio? (6 marks) (b) Critically discuss why most investors hold diversified portfolio. (4 marks) (c)
What is correlation, and explain why it is important in portfolio theory? (5 marks) (d) The capital asset pricing model (CAPM) contends that some risks are diversifiable, but others are not. Critically discuss what is the relevant risk variable considered in the CAPM? In your discussion, provide ONE (1) example for the relevant risk. (10 marks) 2. What is the concept of Efficient Market Hypothesis (EMH)? Compare and contrast between three forms of Efficient Market Hypothesis (EMH) – weak, semi-strong, and strong forms. (10 marks) . Critically discuss TWO (2) evidence supporting and TWO (2) evidence against the Efficient Market Hypothesis (EMH). (10 mark) 4. There are three probable economic outcomes in the evaluation of stock A and B for the second half of 2012. Based on the following information, answer all the questions. (25 marks) State of Economy Boom Normal Recession Probability of State of Economy 20% 50% 30%
Returns on stock A Returns on stock B 8% 5% 2% 20% 12% -10% (a) What is the expected rate of return for stock A and B, respectively? 9 marks) (b) W hat is the standard deviation for stock A and B, respectively? (9 marks) (c) Assuming that stock A and stock B have beta of 0. 8 and 1. 6, respectively. The expected return of the market is 8% and the risk-free rate is 5%. W hat is the required return for stock A and B using Capital Asset Pricing Model (CAPM) method? (4 marks) (d) Based on your calculated answer in part (a) and (c) above, which stock should you invest in? Justify your answer. (4 marks) e) Assume that you want to create a portfolio by investing in these two stocks; 50 percent in stock A and 50 percent in stock B. What is your expected return on this portfolio? (4 marks) 5. Compare and contrast Capital Asset Pricing Model (CAPM), Arbitrage Pricing Theory (APT) and Fama and French Three Factor Model (TFM). (13 marks) 6. In Malaysia, Cagamas is currently the sole issuer of mortgage -backed securities. Critically discuss THREE (3) contributing roles of Cagamas in the financial sector associated with property market in Malaysia. (12 marks)