Funds

Question 1

12. Using the capital asset pricing model (CAPM), calculate the expected return on EFG cormortion shres given follow info.
    S&P/TSX composite total return index 9.25%
    FTSE TMX Canada 91 day T-bill inde 1.05%
    Schedule 1 bank 180 day GIC rate 1.65%
    Government of Canada 10 year bond yield 1.13%
    EFG Corporation average beta over 3 years 1.3

Answer 1

The capital asset pricing model CAPM is a tool that is used to calculate the expected return on portfolio or security given 3 variables
- Return of market index
- The risk free return (Given T-treasure bill 91 day return)
- The beta of portfolio /security
- 3 step to calculate
o Step 1 Deduct the risk free return from the market return = market return – risk free return = 9.25-1.05=8.2
o Step 2: multipy the remaing variable by beta
 8.2%*1.3=10.66%
o Step 3 : Add the risk – free rate back in = 10.66+1.05=11.7

Question 2

13. You have a portfolio 60% equities and 40% bonds. The standard deviations for bonds and stocks are 8% and 11% respectively. Given the correlation btw bonds and stocks of 0.5. what is standard deviation of your portfolio

Answer 2

• The standard deviation of portfolio is almost always LOWER than the weighted standard deviation of the investments held within the portfolio.
• Weighted standard deviation is 0.611% +0.48%=9.8%
• Choose the lower one
• Standard deviation of portfolio = (0.4 X8%)^2+(0.6X11%)^2+2x0.40.6X811*0.5^1/2