Question

Sally Tao graduated from the University of Adelaide in 2014, and after working for five years, has managed to save $300,000, assisted by a recent bequest of $200,000 from a deceased relative, that is currently earning 1.2% annual interest in a term deposit account with her bank. Sally is interested in investing her entire savings in shares, and recalls a University friend who was studying finance mentioning the advantages of investing in a portfolio and the concept of systematic risk. After discussions with a financial adviser Sally has decided that she would like to invest her money in two companies, namely Skenes Industries and Torrens Minerals. Through a search of various internet sites she has found that shares in Skenes have a beta of 1.40, and shares in Torrens 0.8. In addition, her financial advisor has noted that the general consensus amongst financial analysts is that the current expected return on the stock market index is 5.2% and the risk-free rate is 1.8%.

a) Explain to Sally the significance of beta and the difference in beta between the shares in these two companies?

b) What is the expected return on each of these shares?

c) Suppose Sally is aiming to achieve a return of 8.5% on her funds invested in a portfolio consisting of these two shares. How much of her funds should be invested in each of
these shares to achieve this return?

d) What is the beta of the resultant portfolio?

e) Would you support Sally’s investment strategy?

Answer 1

a tock measures the mavement he tocs utn in empaniten to the entine market Int the giln esan, the beta of A) Beta f 2 nge Srenes 1Lu which means ton wy will 0-8 3 market puturn ae itocks renun in the ne 2 141 Likewise a beta 4 087 for Torhens umpiey Change he marketetukn 4 a in hange

CAPM b) ung 8 Rich free nate (RFR) 1.81 Markit netun (MR) Shenes Beta (P) Topnens Beta (BT) 9 (truriy thin a he is S21 1 10 0.8 11 (MR tavn Expected retuun 1 12 1.8+14x (S 2 9-08 .. Shenes neturn 1 1-8+ 08x(S2 Ecesret 2 Tonerens utun X 3 het wupht assmed to Shenes To Tonrens Let weiyte asrgned 0 085 w 1.08%+ w x S.a61. 6

O.085- 0 008 w D.OS96 O D254 D0312 W 81.41.1 AD panefois 0-8x 0.185 14x0.814l 1139h t 014872 1 23346

b hainy CAPM RFR 1.8 . MRE S2 Artuminy hus in not the preminm Marker ush Paemium IO 11 3.4.1. 12 1.4 BTe08 1.4X 3.4, + .8/ 6.547 1 Rs 2 0-8x 3.4 1.18 3 4.521 Ws T wT T1- O.085 Ws 0.0452XS 0 0656x ws t 0.0452 1.a5018 5 6 T-0.95098

8 O.9 5093x D.8 9s098x 1.4 + 7 2.73137 2-D76 0787 & & S0 tb.