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FM301 – Portfolio Analysis and Investment (Final Assessment – Individual Submission) Issued on: 28th MAY, 2020. Due on: 8th JUNE, 2020 Type your complete answers and submit via Moodle Submission Box, on or before the due date. 100 marks {Weight = 50%} Question 1: [20 marks] For a recent 10-year period, a mutual fund company reported performance (average annual return) for two of its funds as follows: Fund Average Return Equity-Income Fund 10.50 percent Personal Strategy Growth Fund 9.50 percent Assume you invested $10,000 in each fund at the beginning of this 10-year period. (a) How much difference would there be in the ending wealth (after 10 years) between the two funds? [10 marks] (b) For the same two funds, the ending wealth after five years was $1.45 per dollar invested for the Equity-Income Fund and $1.25 per dollar invested for the Personal Strategy Growth Fund. What were that annual average returns for each fund for this five-year period? [10 marks] Question 2: [15 marks] An analyst gathered the following data about stocks J. K. L which together form a value weighted index: December 31, Year 1 December 31, Year 2 Stock Price Shares outstanding Price Shares Outstanding J 50 10,000 $60 10,000 K 40 8,000 $30 16,000 L 50 12,000 $40 12,000 Calculate the ending value-weighted index (base index = 100), and briefly explain what it means. Provide your answer up to 2 decimal points. Question 3: [20 marks] You open a margin account at Chas Pigeon, a discount broker. You subsequently short 100 shares of Exciting.com at $300 per share, believing it to be overpriced. This transaction is done on margin, which has an annual interest rate of 6 percent. Exactly one year later, Exciting has declined to $60 a share, at which point you cover your short position. You pay brokerage costs of $25 on each transaction you make. The margin requirement is 50 percent. (a) Calculate your dollar gross and net gain or loss on this position, taking into account both the margin interest and the transaction cost to sell. Round your answers to nearest whole number [10 marks] (b) Calculate the percentage return on your investment (the amount of money you put up initially, including the brokerage costs to buy). Round your answers to nearest whole number [10 marks] Question 4: [15 marks] Suppose a risk-free asset has a 3 percent return and a second risky asset has a 15 percent expected return with a standard deviation of 25 percent. Calculate the expected return and standard deviation of a portfolio consisting of 15 percent of the risk-free asset and 85 percent of the second asset. Provide your final answers up to two decimal points Question 5: [15 marks] Evaluate the following investments, and explain the “best” choice among Portfolios A, B, and C, assuming that borrowing and lending at a risk-free rate of ?? = 3 percent is possible. Portfolio A: ?(??) = 13% , ?(??) = 15% Portfolio B: ?(??) = 10% , ?(??) = 8% Portfolio C: ?(??) = 11% , ?(??) = 14% Question 6: [15 marks] Suppose that the risk-free rate is 6 percent and the expected return on the market portfolio is 15 percent. An investor with $1.5 million to invest wants to achieve a 25 percent return on a portfolio combining the risk-free asset and the market portfolio. Calculate how much this investor would need to borrow at the risk-free rate in order to establish this target expected return. Provide your final answers up to two decimal points. ~END~ For all relevant formulas – refer to your text book and/or lecture notes.