7. Estimate the required rate of return for your stocks [E(Ri1), E(Ri2)] as at 28th August 2015 using the CAPM. Use 6.5% as a market risk premium and the 10- year Australian Government bond rate as at 28th August 2015 as a risk-free rate [rf]. 7.1. Establish the CAPM equation and compute the required rate of return for the first stock [E(Ri1)] on the 5th spreadsheet in which you produced [Ei1] using a regression analysis. You must present the CAPM with corresponding values used. In doing so, the process should show your understanding of market risk premium. (i.e. how is it measured?) [3 marks] 7.2. Compute the required rate return for the second stock [E(Ri2)] on the 6th spreadsheet in which you produced [Ei2 ] using a regression analysis. You must present the CAPM with corresponding values used. Which stock is more sensitive to a market-wide event? Please answer by referring to and interpreting the value of an appropriate measurement obtained in Part I. [3 marks] 2. Suppose that you invested 20% of your wealth in your first stock, 20% in your second stock, 30% in the market index, and 30% in the 10-year Australian Government bond to form a four-asset portfolio. 2.1. Compute the beta of your portfolio. [4 marks] 2.2. You wish to increase your portfolio's exposure to a change in market condition. How can you make it happen using the currently available assets in your portfolio? [2 marks] 3. Suppose that you have $10,000 invested in your first stock (A). You would like to form a two-stock portfolio by investing another $10,000 in either your second stock (B) or the market index, ASX200 (M). You would like the total risk of your portfolio to be as low as possible. 3.1. Which asset (B or M) would you choose as an addition and why? Show all your workings. [10 marks] 3.2. Which combination (i.e. A&B or A&M) would have less exposure to a market-wide event? [5 marks] 3.3. By forming a two-asset portfolio using the asset chosen under 3.2, were you able to achieve diversification benefit? Please answer by referring to and interpreting the value of an appropriate measurement obtained in Part I. [2 marks] 4. Based on your results in Part I, is each of your stocks underpriced or overpriced? And why? Consequently, which recommendation would you make for each stock, "Buy/Hold" or "Sell/don't buy"? [6 marks] 5. You observe a portfolio for five years and determine that its average return is 12% and the standard deviation of its returns is 20%. Can you be 95% confident that this portfolio will not lose more than 30% of its value next year? Please justify. [4 marks] 6. You have constructed a diversified portfolio of stocks such that there is no unsystematic risk. Explain why the required return of that portfolio should be greater than the required return of a risk-free security. [4 marks] S