This is a very nice paper and reads very well. Thank you for another job well done!
(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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