Assessment purpose
The assignment is designed to enhance students' skills in analysing the implication of the time value of money as well as facilitating students' discussion of the role of large diversified banks.
Part A: Risk and Return for Portfolios
You are given the following data on several shares:
|
State of the
Economy
|
Probability
|
Returns in Each State of the Economy
|
|
Gere Mining
|
Reubenfeld Films
|
DeLorean Automotive
|
|
Boom
|
25%
|
40% |
247n
|
-20%
|
|
Expansion
|
50%
|
12%
|
10%
|
12% |
|
Recession
|
25%
|
-20%
|
-12%
|
40% |
a) Calculate the expected return and standard deviation for each share.
b) Calculate the expected return and standard deviation for a portfolio invested equally in Gere Mining and Reubenfeld Films. How does the standard deviation of this portfolio compare to a simple 50-50 weighted average of the standard deviations of the two shares?
c) Calculate the expected return and standard deviation for a portfolio invested equally in Gere Mining and Delorean Automotive. How does the standard deviation of this portfolio compare to a simple 50-50 weighted average of the standard deviations of the two shares?
d) Explain why your answers regarding the portfolio standard deviations are so different in parts b and c.
Part B: Essay - 1,000 words
What is meant by an agency cost or agency problem? Do these interfere with maximizing shareholder wealth? Why or why not? What mechanisms minimise the cost of agency cost?
Assessment Criteria:
- Demonstrated knowledge of the agency problem and shareholder wealth maximization.
- Logical inferences drawn from information presented and appropriate justification of stance taken.
- Overall presentation of the argument is relevant and appropriate.