Portfolio Analysis, Investment Returns, and Future Value Planning

This assignment provides solutions to financial management problems involving future value calculations, portfolio analysis, and investment returns. It begins by calculating the future cost of a dream house considering inflation and determines the annual investment needed to achieve this goal. The assignment then analyzes a portfolio of assets, calculating portfolio beta, individual asset returns, and overall portfolio return. It further explores expected returns based on the Capital Asset Pricing Model (CAPM) and evaluates asset performance against expectations. The final section assesses the risk and return profiles of different investment options, determining the range of returns, expected rates of return, and relative riskiness. The student-contributed solution is available on Desklib, a platform offering a range of study tools and resources for students.

FINANCIAL MANAGEMENT
STUDENT ID:
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Question 1A
a) Current price of dream house = $ 200,000
Inflation rate = 5% per year
The relevant formula is stated below (Damodaran, 2015).
FV = PV (1+r)n
In the given case, PV = $ 200,000, r = 5% , n = 25 years
Hence, value of dream house after 25 years = 200000*(1.05)25 = $ 677,271
b) The future value of the annuity must be equal to the price of the house after 25 years.
The relevant formula is stated below (Arnold, 2015).
In the given scenario, FV of annuity = $ 677,271, r = 9% p.a., n =25 years
Hence, $ 677,271 = P (1.0925-1)/0.09
Solving the above, we get P = $ 7,996.03
Thus, every year till her retirement Jessica would have to deposit $ 7,996.03 to buy her dream
house.
c) The relevant formula would have been modified as follows (Northington, 2015).

In the given scenario, FV of annuity = $ 677,271, r = 9% p.a., n =25 years
Hence, $ 677,271 = (1.09)P (1.0925-1)/0.09
Solving the above, we get P = $ 7,335.81
Question 1B
a) Weight of A = 20000/100000 = 0.2
Weight of B = 35000/100000 = 0.35
Weight of C = 30000/100000 = 0.3
Weight of D = 15000/100000 = 0.15
Beta of portfolio = 0.2*0.8 + 0.35*0.95 + 0.3*1.50 + 0.15*1.25 = 1.13
b) The relevant formula for asset return is shown below.
Returns (%) = [(P1 + I – P0)/P0]*100
Here, P1= Price Today, P0 =, I = yearly income
Return (%) for asset A = [(20000 [phone])/20000]*100 = 8%
Return (%) for asset B = [(36000 [phone])/35000]*100 = 6.86%
Return (%) for asset C = [(34500 +0 -30000)/30000]*100 = 15%
Return (%) for asset D = [(16500 [phone])/15000]*100 = 12.50%

c) The relevant formula for portfolio return is shown below
Returns (%) = [(P1 + I – P0)/P0]*100
Here, P1= Price Today, P0 =, I = yearly income
Here,
P0 = Cost at purchase = 20000+35000+30000+15000 = $100,000
P1= Price Today =20000+36000+34500+16500 = $107,000
I = yearly income =1600+1400+375 = $3,375
Return (%) for portfolio = [(107000 [phone])/100000]*100 = 10.38%
d) The relevant formula is shown below (Northington, 2015).
Expected return = Risk free rate + Beta*(Market returns – Risk free rate)
Risk free rate = 4%, market returns = 10%,
Expected returns (A) = 4 + 0.8*(10-4) = 8.8%
Expected returns (B) = 4 + 0.95*(10-4) = 9.7%
Expected returns (C) = 4 + 1.5*(10-4) = 13%
Expected returns (D) = 4 + 1.25*(10-4) = 11.5%
e) Assets A and B performed worse than expectations while Asset C and D exceeded the
expectations. One of the possible explanations for this could be that shares A and B are
overvalued while shares C and D are undervalued (Damodaran, 2015).
Question 1C
a) Range of rate of return on camera A = Maximum returns – Minimum Returns = 30% -20%
= 10%

Range of rate of return on camera B = Maximum returns – Minimum Returns = 35% -15% =
20%
b) Expected rate of return on camera A = 20*0.25 + 25*0.5 + 30*0.25 = 25%
Expected rate of return on camera B = 15*0.2 + 25*0.55 + 35*0.25 = 25.5%
c) Camera B is more risky as the deviation of rate of returns from mean in case of this camera
is higher in comparison to Camera A (Arnold, 2015).

References
Arnold, G. (2015) Corporate Financial Management. 3rd ed. Sydney: Financial Times
Management.
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Northington, S. (2015) Finance, 4th ed. New York: Ferguson