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Question 1 (a) You are asked to price the following bonds to be issued by Company X. Puttable Years to maturity Bond A No 7 Bond B Yes 7 Appraise which bond should have a lower yield-to-maturity (YTM) and provide a simple explanation given that all else are equal. (10 marks) (b) Your client is holding the following securities in his portfolio. Stock Beta Expected Return A 1.2 11.4% B 0.9 9.3% C 1.5 13.5% Portfolio D 1.0 10% Portfolio E 0 3% (i) Explain why he would hold Portfolio E. (10 marks) (ii) If you expect the stock market to rise strongly in the coming weeks, which stocks would you recommend your client to hold more of. Indicate your reasoning. (12 marks) (c) You are confronted with the following choice \textendash{} to invest in Security A or B. One of these securities is undervalued. Security A Security B Standard Deviation 25% 40% Beta 1.5 1.3 If both securities have the same return, which would you invest in? Explain, using your knowledge of the Capital Asset Pricing Model (without any calculation). (12 marks)

          Question 1
(a) You are asked to price the following bonds to be issued by Company X.
Puttable
Years to maturity
Bond A
No
7
Bond B
Yes
7
Appraise which bond should have a lower yield-to-maturity (YTM) and provide a simple
explanation given that all else are equal.
(10 marks)
(b) Your client is holding the following securities in his portfolio.
Stock
Beta
Expected Return
A
1.2
11.4%
B
0.9
9.3%
C
1.5
13.5%
Portfolio D
1.0
10%
Portfolio E
0
3%
(i) Explain why he would hold Portfolio E.
(10 marks)
(ii) If you expect the stock market to rise strongly in the coming weeks, which stocks would
you recommend your client to hold more of. Indicate your reasoning.
(12 marks)
(c) You are confronted with the following choice \textendash{} to invest in Security A or B. One of
these securities is undervalued.
Security A
Security B
Standard Deviation
25%
40%
Beta
1.5
1.3
If both securities have the same return, which would you invest in? Explain, using your
knowledge of the Capital Asset Pricing Model (without any calculation).
(12 marks)

Question 1
(a) You are asked to price the following bonds to be issued by Company X.
Puttable
Years to maturity
Bond A
No
7
Bond B
Yes
7
Appraise which bond should have a lower yield-to-maturity (YTM) and provide a simple
explanation given that all else are equal.
(10 marks)
(b) Your client is holding the following securities in his portfolio.
Stock
Beta
Expected Return
A
1.2
11.4%
B
0.9
9.3%
C
1.5
13.5%
Portfolio D
1.0
10%
Portfolio E
0
3%
(i) Explain why he would hold Portfolio E.
(10 marks)
(ii) If you expect the stock market to rise strongly in the coming weeks, which stocks would
you recommend your client to hold more of. Indicate your reasoning.
(12 marks)
(c) You are confronted with the following choice – to invest in Security A or B. One of
these securities is undervalued.
Security A
Security B
Standard Deviation
25%
40%
Beta
1.5
1.3
If both securities have the same return, which would you invest in? Explain, using your
knowledge of the Capital Asset Pricing Model (without any calculation).
(12 marks)

Added by Brooke G.

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