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INV4801 EXAM PACK 2023
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QUESTIONS AND ANSWERS
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INV4801EXAM
PACK 2023
QUESTIONS AND
ANSWERS
, Investment Portfolio Management
January/February 2018
INV4801
Question 1
a)
WACC excluding the Pension Plan’s assets and liabilities
Equity = Assets – liabilities = 1.0 – 0.6 = 0.4
Weight for equity = 0.4/ (0.4 + 0.6) = 0.4
Weight for debt = 0.6/ (0.4 + 0.6) = 0.6
Beta = (0.4 x 1.9) + (0.6 x 0.0) = 0.76
WACC = 7 + 0.76(4) = 10.04%
b)
WACC including Pension Plan’s assets and liabilities
Weight of equity = 0.55
Weight of debt = 1 – 0.55 = 0.45
Beta TA = [0.4/(1.0 + 0.7) X 1.9] + [1.3/1.7 X 0.0] = 1.156
Beta TA = [1.0/1.7 x 1.4] + [0.7/1.7 x Beta]
1.156 = 0.8235 + 0.4118Beta
0.3325 = 0.4118Beta
,0.8074 = Beta
WACC = 7 + 0.8074(4) = 10.23%
c) Implications of not including the Pension Plan’s assets and liabilities in
Rusere Investments’ capital decision-making process
• Pension plan assets fund the payment pension liabilities
• Pension plan’s investment performance is judged relative to the adequacy of
its assets with respect to funding of pension liabilities
• Without the inclusion of Pension plan assets and liabilities makes it impossible
for setting an investment policy
• Without the inclusion of the pension plan assets and liabilities makes it difficult
to determine pension surplus or underfunded plan
d) Country Apple
Beta = Correlation x (standard deviation of apple/ standard deviation of market)
= 0.79 x (0.11/0.10)
= 0.869
RP (fully integrated) = Standard deviation x correlation x Sharpe ratio
= 11% x 0.79 x 0.26
= 2.26
RP (fully segmented) = standard deviation x Sharpe ratio
= 11% x 0.26
= 2.86
RP = (2.26 x 0.85) + (2.86 x 0.15)
= 2.35
, Expected returns = Rf + RP
= 3.5 + 2.35
= 5.85
Country Borrowdale
Beta = Correlation x (standard deviation of apple/ standard deviation of market)
= 0.58 x (0.21/0.10)
= 1.218
RP (fully integrated) = Standard deviation x correlation x Sharpe ratio
= 21% x 0.58 x 0.26
= 3.17%
RP (fully segmented) = standard deviation x Sharpe ratio
= 21% x 0.26
= 5.46%
RP = (3.17 x 0.65) + (5.46 x 0.35)
= 3.97%
Expected returns = Rf + RP
= 3.5 + 3.97
= 7.47%
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