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Investment Banking and Brokerage Cat

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47 views2 pages

Investment Banking and Brokerage Cat

Uploaded by

cyrus
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INVESTMENT BANKING AND BROKERAGE CAT

QUESTION ONE
Security returns depend on only three risk factors-inflation, industrial production and the aggregate
degree of risk aversion. The risk free rate is 8%, the required rate of return on a portfolio with unit
sensitivity to inflation and zero-sensitivity to other factors is 13.0%, the required rate of return on a
portfolio with unit sensitivity to industrial production and zero sensitivity to inflation and other
factors is 10% and the required return on a portfolio with unit sensitivity to the degree of risk
aversion and zero sensitivity to other factors is 6%. Security i has betas of 0.9 with the inflation
portfolio, 1.2 with the industrial production and-0.7 with risk bearing portfolio—(risk aversion)

Assume also that required rate of return on the market is 15% and stock i has CAPM beta of 1.1

REQUIRED:

Compute security i's required rate of return using (8 marks)

QUESTION TWO
XYZ ltd. is considering three possible capital projects for next year. Each project has a 1 year life,
and project returns depend on next years state of the economy. The estimated rates of return are
shown below.

STATE OF THE PROBABILITY RATE OF RETURN


ECONOMY OF OCCURRENCE A B C

Recession 0.25 10% 9% 14%


Average 0.50 14 13 12
BOOM 0.25 16 18 10

REQUIRED:

a. Find each project expected rate of return, variance, standard deviation and coefficient
of variation.

b. Compute the correlation coefficient between

i. A and B
ii. A and C
iii. B and C

c. Compute the expected return on a portfolio if the firm invests equal wealth on each asset.

d. Compute the standard deviation of the portfolio.(10 marks)

QUESTION THREE [10 MARKS]


a) Explain three theories that attempt to explain the concept of term structure of interest
rates. [6 marks]
a) Explain any five documents that are necessary to show proof of the existence of a debt.
[6 marks]

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