2
, what is your optimal
portfolio and the corresponding utility level (10 marks)
Page 2 of 2
3. Consider the five stocks as follows:
Stock Beta βi Actual return (%)
1 0.9 12
2 1.3 13
3 0.5 11
4 1.1 12.5
5 1 12
The expected return for the market is 12% and the risk-free rate is 8%.
a) What is market risk premium Calculate the expected rate of return for each stock.
(10 marks)
b) Determine which stocks are traded at fair value, undervalued, and overvalued.
What investment decisions should be made based on the information given
Explain your answers. (15 marks)
4. Consider a single-owner firm, the transformation curve is:
(1 + 1)
2 + 2
2 = 21
if the initial resources 1 = 5 and the market interest rate is 10%.
a) Solve for the wealth maximisation problem and illustrate in a diagram your
answer. (15 marks)
b) Work out the utility maximisation problem if the consumer’s utility function is
= 12
0.5
. (10 marks)
