Q.1 James is considering investing in security A that has offered average annual return of 12% and standard deviation of 18% and security B which has offered average annual returns of 10% and standard deviation of 14% in the recent past.
(a) If the correlation between A and B is 0.35, what is the least risky combination
of these two assets?
(b) James does not mind taking excess risk provided he can earn an average
return of 10% from the portfolio. The returns on 90-day T-bills are around
2.50% per annum. Assuming that James can borrow and lend at the risk free
rate of return, advise how much James should invest in the portfolio
(comprising of security A and security B) and the risk free asset so that the
combination of risky portfolio and risk free asset provides 10% return. How
much would be invested in security A, security B, and the risk free asset and
what would be the risk of the new portfolio?
Q.2 Read the enclosed article in the Wall Street Journal and answer (word limit
maximum: 500 words) the following questions:
a) Why did Merck's price fall so significantly and which important finance
theory the case relates to and why?
b) As CEO of Merck, Raymond Gilmartin made the decision to stop sales
of Vioxx. Should he have withheld this information since it would have a
clear negative effect on share price and he had an obligation to
maximize the value of these shares?
Q.3. What is the price of a 365-day Treasury Bill with a face value of £1,000,000 and
which has 59 days to maturity if it trades at a discount rate of 6.75%