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QUESTION 1 (25 MARKS) a. Explain in detail how common stocks must earn risk premium....

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Finance

QUESTION 1 (25 MARKS) a. Explain in detail how common stocks must earn risk premium. (5 marks) b. Examine the differences between investors who are risk averse, risk neutral, and risk lover. (6 marks) c. You are considering investing two RM1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with 2 risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a variance of 0.0081. What percentages of your money must you invest in the T-bill and P respectively, if you want to form a portfolio with an expected rate of return of 0.11? (7 marks) d. Consider Khairul have a portfolio that offers an expected rate of return of 20% and a standard deviation of 26%. T-bills offer a risk-free 10% rate of return. Determine the maximum level of risk aversion for which the risky portfolio is still preferred to bill (by an investor that is limited to investing all their wealth in the risky portfolio or all of their wealth in T-bills).

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