BAP53 - Basic Corporate Finance Concepts In Business

CORPORATE FINANCE
STUDENT ID:
[Pick the date]

Question 1
1) The expected returns can be estimated as shown below.
Expected Returns (Aussie Traders) = 0.3*(-20) + 0.2*(15) + 0.35*(30) + 0.15*(50) = 15%
Expected Returns (Blue Star) = 0.3*(5) + 0.2*(6) + 0.35*(8) + 0.15*(10) = 7%
Expected Returns (ASX 300) = 0.3*(-4) + 0.2*(11) + 0.35*(17) + 0.15*(27) = 11%
2) The standard deviation of returns can be computed as shown below.
Standard Deviation = (0.063)0.5 = 25.10%
Standard Deviation = (0.00671)0.5 = 8.19%
Standard Deviation = (0.01445)0.5 = 11.60%

3) The better measure of the risk would be standard deviation since it would entail both
systematic and unsystematic risk unlike beta which captures only the systematic risk. As a
result, beta is an incomplete measure of risk (Damodaran, 2015).
4) The relevant inputs are summarised below.
As per the CAPM approach, the following equation holds.
Required Return = Risk free rate + Beta * Market Risk Premium
Required Return (Aussie Traders) = 5 + 1.68*(11-5) = 15.08%
Required Return (Blue Star) = 5 + 0.52*(11-5) = 8.12%
5) As per the given details, $ 50,000 is invested in Aussie Traders and $ 100,000 is invested
in Blue Star.
Total money invested = 50000 + 100000 = $ 150,000
Weight of Aussie Traders = (50000/150000) = 0.33
Weight of Blue Star = (100000/150000) = 0.67
Portfolio beta = 0.33*1.68 + 0.67*0.52 = 0.91
Portfolio Return = 0.33 *15.08 + 0.67*8.12 = 10.44%
6) As per the given details, $ 100,000 is invested in Aussie Traders and $ 50,000 is invested
in Blue Star.
Total money invested = 50000 + 100000 = $ 150,000
Weight of Aussie Traders = (100000/150000) = 0.67
Weight of Blue Star = (50000/150000) = 0.33