Return and Risk

Return and Risk

You have been hired as a consultant for a Saudi Arabian hospital to assess the risk for securities. You expect your mutual fund portfolio A to earn a rate of 11% this year. The beta of the portfolio is .8.

1. If the rate of return on risk-free assets is 4% and you think the rate of return on the A portfolio will be 14%, then what expected rate of return would you have to have before deciding whether to invest more in the mutual fund?


2. Is this mutual fund attractive?


3. If the T-bill rate is 4% and the expected return for the market is 12%, then using the CAPM – compute the following:
   
   
   
   1. A) What is the risk premium on the market?
   
   
   2. B) What would the required return be on an investment that has a beta of 1.5?
   
   
   3. C) If a mutual fund B with a beta of .8 offers an expected rate of return of 9.8% – is the NPV positive?
   
   
   4. D) If the market expects to return 11.2% from Mutual Fund X, what is its beta?
   
   
   
   


4. How could you mix an equity mutual fund with a risk–free position in Treasury bills or Certificates of Deposit to increase the expected rate of return on the portfolio but keep the risk level the same or even reduce the risk?


5. As part of your assessment in this assignment, explain why a mutual fund needs to provide an expected rate of return that exceeds the security market line that is predicted in order for investors to find the fund attractive.

Your final submission will be 4–5 pages in length excluding the cover and reference pages. Be sure to include:

• Summary of findings.


• Analysis of the acceptable level of risk for each scenario.

Your paper should meet the following structural requirements:

• The paper should be 4–5 pages in length, not including the cover sheet and reference page.


• The paper should be formatted according to APA and Saudi Electronic University writing standards.


• Provide support for your financial statements with in–text citations from a minimum of four scholarly articles.


• Two of these sources may be from the class readings or textbook, but the others must be external and come from peer–reviewed journals.


• The Saudi Digital Library is a good place to find these references.