Corporate Finance

Corporate Finance (BBF304) TMA 1 (25%)
Total Marks: 100%
There are only three possible market outcomes in the evaluation of stock A and B in the next quarter: bear, normal, and bull market. Based on the following information given, answer the following questions.

(a) What is the reward for both stocks? (8 marks)

(b) What is the risk for both stocks? Interpret the result. (10 marks)

This implies that whilst on average, the expected returns on investment in Maybank’s shares is 7.5%, the returns may fluctuate between 7.5% − 3.35% = 4.15% (lower boundary) and 7.5% + 3.35% = 10.85% (upper boundary).

20% -24.33% = - 4.33%
20% +24.33% = 44.33%

(c) Assuming that stock A and stock B have beta of 2.5 and 1.9, respectively, the expected return on the market is 8%, and the risk-free rate is 5%, for both stocks. What is the required return for stock A and B? (6 marks)

c) Use CAPM formula to calculate the expected return: E(RA) = Rf + Beta(E(RM) – Rf)
Expected rate of return = Risk Free Return X Beta ( Market Return - Risk Free Return)
Stock A : Risk Free 0.05, Market Rate of Return 0.08 and Beta is 2.5
Stock B:   Beta is 1.9

(d) Based on your calculated answer in part (c) above, which stock should you be invested ? Justify your answer. (3 marks)

(e) Now assuming that if you want to create a portfolio by investing in these two stocks given that 40 percent in stock A and 60 percent in stock B. What is your expected return on this portfolio?

(a) According to Efficient Market Hypothesis (EMH), there are three levels of efficiency. List the THREE (3) levels and briefly discuss each type of efficiency. (9 marks)

(b) Evaluate the potential problems of Efficient Market Hypothesis (EMH), in which its relevancy in the modern investing environment is being challenged. (12 marks)

The potential problems of Efficient Market Hypothesis arises from the Assumptions made in EMH. The EMH does not full explained the actual market...