Page 1 of 2 Fin-40002 Financial Markets Assignment 1 The following is the first of three exercises that form the coursework assessment component for Fin-40002. The coursework is worth 15% of the total marks overall and these marks will be based upon the best two exercises of the three you submit. Each exercise is equally-weighted. You must submit all three Assignments. The Assignment must be your own work: it is not a Group Work activity. The penalties for plagiarism and collusion are severe and may result in you being awarded a zero mark for the Assignment or the module. Answers must be presented clearly and marks will be awarded for presentation. You must show all calculations and necessary working out. Answers not showing supporting calculations will be awarded zero. Hand-in Date: 12 pm, Friday 23rd November 2013; Darwin Lecture Theatre: late submissions awarded zero. Answer ALL questions: 50 Marks 1. Consider a risky portfolio. The end-year cash flow derived from the portfolio will be either ÂŁ75,000 or ÂŁ200,000 with equal probabilities of 0.5. The alternative risk-free investment in T-bills pays 6% per annum. a. If you require a risk premium of 8%, how much will you be willing to pay for the portfolio? Explain your Answer. b. Suppose that the portfolio can be purchased for the amount you calculated in a). What will be the expected rate of return on the portfolio? c. Now suppose that you require a risk premium of 12%. What price will you be willing to pay for the portfolio? d. Comparing your answers a) and c), what do you conclude about the relationship between the required risk premium and the price for which a portfolio will sell? Explain why. 6 marks 2. Suppose that you manage a risky portfolio with an expected rate of return of 18% and standard deviation of 28%. The T-bill rate is 8%. a. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. What is the expected value and standard deviation of the rate of return…