(a) An investor is evaluating a two-asset portfolio of the following securities: Assumptions Expected Return Expected Risk () AMK Inc.

(a) An investor is evaluating a two-asset portfolio of the following securities:

Assumptions                       Expected Return                      Expected Risk (σ)

AMK Inc. (US)                    19%                                              23%

GXY Ltd. (AU)                    16%                                               25%

If the two securities have a correlation of -0.44 (i.e., ρ = -0.44), what are the

expected risk and return for a portfolio that has the minimum combined risk?

 (b) John, CFO of ABM Ltd., estimates that the risk-free rate is 2.5%, the company’s credit

risk premium is 5%, the domestic beta is 1.12 and the international beta is 0.85. The

company’s capital structure comprises 25% debt and 75% equity. The expected rate

of return on the market portfolio held by a well-diversified domestic investor is 11%.

The expected market return for a larger globally integrated equity market is 10%. ABM

Ltd’s before tax cost of debt is 8%. The corporate income tax rate is 30%. For both

the domestic CAPM and ICAPM, calculate ABM Ltd.’s weighted average

cost of capital.

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