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SECTION A: Question 1 is compulsory and must be attempted Question 1 JL Co has...

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SECTION A: Question 1 is compulsory and must be attempted Question 1 JL Co has K1,000,000 available for investments. The proposal is to invest half the total funds available in asset A, then distribute the other half in the ratio 1: 1 between the remaining two (02) assets (C, & D). Other details relating to the investments are as follows; Asset Average return % Beta value A 12.0 1.10 15.0 1.20 D 11.0 0.92 The market rate of return is 10% while the yield on treasury bills is 5% Required: a) Briefly explain the importance of considering correlation coefficient of assets performance in the process of diversification. [10 marks) b) Using CAPM, calculate the required rate of return for each of the three (3) assets (A, C and D) and comment on the results by comparing with the reported average returns above. [12 marks] c) Calculate the portfolio average return assuming that the K1,000,000 is invested in the three (3) assets in the proportions stated above. [9 marks) d) Calculate the portfolio beta value and its associated required rate of return based on CAPM. Comment on whether the portfolio is efficient or not. [9 marks] [Total: 40 marks)

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