Question 5 (6 marks)

Use the following information for questions 1-3:

Pioneer Limited share has annual return of 12%, 6%, -1%, and -5% in years 2012, 2013, 2014
and 2015 respectively.

1. Calculate the average yearly return.

12% + 6% 1% 5%
=
4
= 3%

2. Calculate the variance.

(12% 3%)2 + (6% 3%)2 + (1% 3%)2 + (5% 3%)2

2 =
41
2 = 0.57%

3. Calculate the volatility.

= 0.57%
= 7.53%

4. could be eliminated by portfolio diversification.

a. Systematic risk
b. Systemic risk
c. Total risk
d. Unsystematic risk

5. Interest rate is an example of

a. Systematic risk
b. Total risk
c. Unsystematic risk
d. Systemic risk

6. Market risk is measured by while total risk is measured by

a. Beta Beta
b. Beta Standard deviation
c. Standard deviation Beta
d. Standard deviation Standard deviation

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Question 5 (6 marks)
Use the following information for questions 1-6:
The following data are provided regarding each state and return.
State Probability Return
Strong 15% 20%
Weak 40% -6%
No change 45% 12%

1. Calculate the expected return.

E(r) = (15%*20%) + (40%*-6%) + (45%*12%)
E(r) = 6%

2. Calculate the variance.

2 = 15%(20% 6%)2 + 40%(6% 6%)2 + 45%(12% 6%)2
2 = 1.03%

3. Calculate the volatility.

= 1.03%
= 10.16%

4. Recession is an example of
a. Systematic risk
b. Systemic risk
c. Total risk
d. Unsystematic risk

5. A well-diversified portfolio has

a. Non-systematic risk
b. Systematic risk
c. Total risk
d. All of the above

6. is measured by a shares standard deviation.

a. diversifiable risk
b. systematic risk
c. total risk
d. unsystematic risk

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Question 5 (6 marks)
Use the following information for questions 1-6:
An investor holds a portfolio of two shares. The correlation between the two shares is 0.70 and
their expected return, volatility and beta as follows:
Share Investment Expected return Volatility Beta
St. George Bank 30,000 20.00% 12.00% 0.90
Westpac Bank 10,000 26.00% 14.00% 1.40

1. Calculate the weight of St. George Bank share.

Total invested = 30,000 + 10,000 = $40,000

SGB Weight = 30,000 / 40,000 = 75%

2. Calculate the weight of Westpac Bank share.

WPB Weight = 10,000 / 40,000 = 25%

3. Calculate the portfolio expected return.

( ) = (75% 20%) + (25% 26%)

( ) = 21.50%

4. Calculate the portfolio variance.

2 = 12 12 + 22 22 + 21,2 1 2 1 2
2 = 75%2 12%2 + 25%2 14%2 + 2 0.7 75% 25% 12% 14%
2 = 1.37%

5. Calculate the portfolio volatility.

= 2
= 1.37% = 11.72%

6. Calculate the portfolio beta.

= (75% 0.90) + (25% 1.40)

= 1.03

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Question 5 (6 marks)
Use the following information for questions 1-6:
Pioneer Limited, a gold manufacturer, goes long in a forward contract with an exercise price
of $500 per ounce for 1,000 ounces only to be exercised in 6 months.

1. Calculate the gain or loss if market gold price after 6 months is $600 per ounce.
() = ( )
() = (600 500) 1,000
() = $100,000
$100,000

2. Calculate the gain or loss if market gold price after 6 months is $450 per ounce.
() = ( )
() = (450 500) 1,000
() = $50,000
$50,000

3. Draw the long position in the forward contract based on the two scenarios.

4. In this example, Pioneer Limited is considered

a. Arbitrageur
b. Hedger
c. Speculator
d. None of the above

5. Long position means

a. Buy
b. Hold
c. Sell
d. None of the above

6. Forward contracts are traded

a. In Exchange
b. Over The Counter
c. Both (a) and (b) are correct
d. Neither (a) nor (b) are correct

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Question 5 (6 marks)
Use the following information for questions 1-6:
Omega Limited, a gold producer, goes short in a forward contract with an exercise price of
$500 per ounce for 1,000 ounces only to be exercised in 6 months.
1. Calculate the gain or loss if market gold price after 6 months is $600 per ounce.
() = ( )
() = (500 600) 1,000
() = $100,000
$100,000

2. Calculate the gain or loss if market gold price after 6 months is $450 per ounce.
() = ( )
() = (500 450) 1,000
() = $50,000
$50,000

3. Draw the short position in the forward contract based on the two scenarios.

4. In this example, Omega Limited is considered

a. Arbitrageur
b. Hedger
c. Speculator
d. None of the above

5. Short position means

a. Buy
b. Hold
c. Sell
d. None of the above

6. Forward contracts are

a. Binding Contracts
b. Non-binding Contracts
c. Both (a) and (b) are correct
d. Neither (a) nor (b) are correct