Question 1 Portfolio valuation
Consider shares in two companies, JAY and KAY, as follows:
| Expected Return E(R) |
Standard Deviation |
Correlation Coefficient |
|
| Share JAY | 12% | 18% | – 0.3 |
| Share KAY | 24% | 32% |
a) Calculate the covariance between Share JAY and KAY returns.
b) What is the expected return and standard deviation of returns on a portfolio comprising 35% in Share JAY and 65% in Share KAY?
c) If you wanted to create a portfolio consisting only of these two shares, how much would you need to invest (weights) in each share so that your portfolio return would be equal to 15.6%? Note: do not round.
d) Using the weights calculated in part c), calculate the variance and standard deviation of your portfolio.
Question 2 Bond valuation
Jasmine Ltd is considering issuing bonds to raise funds for a new project. The following three options are being considered.
| Bond | Coupon Rate | Coupon/Compounding Frequency | Yield | Term in years | Face Value |
| A | 0.00% | half-yearly | 7.50% | 5 | $1,000 |
| B | 6.50% | half-yearly | 7.50% | 10 | $1,000 |
| C | 8.40% | Yearly | 7.50% | 8 | $1,000 |
a) Calculate the market price of each bond.
b) Classify each bond as either selling at a premium, par or discount.
c) Assume Jasmine has decided to issue only B Bonds. If Jasmine Ltd needs to raise $465,260 how many bonds would need to be issued?
Question 3- Share valuation
Calculate the current market price of each of the following shares assuming a discount rate of 10%.
a) NoChange Ltd is a company with no growth potential. Its last dividend was $4.25, and it expects no change in future dividends.
b) ConstantGrowth Ltd just paid a dividend of $4.25 and it expects its dividend to grow steadily at 4% per year.
c) SteadyGrowth Ltd plans to pay a dividend of $4.25 next year. It expects its dividend to grow steadily at 4% per year.
d) SuperGrowth Ltd just paid a dividend of $4.25 and it expects its dividend to grow quickly at 12% per year for the next three years. It then expects the growth rate to remain constant at 4% per year.
e) QuickGrowth Ltd plans to pay a dividend of $4.25 next year. It expects its dividend to grow quickly at 12% per year for the next three years. It then expects the growth rate to remain constant at 4% per year.
Conclusion
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