What is the value of the shares

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(a) Mary has a portfolio consisting of 10 different companies' shares. She is considering selling all AAA shares in the portfolio that worth $50,000 and acquiring $50,000 of BBB shares to replace the AAA shares. AAA shares and BBB shares have the same expected return and standard deviation. Her friend Alice comments, "It will not make a difference whether you keep all of AAA shares or replace them with $50,000 of BBB shares'.

(i) Explain the circumstance(s) under which you would agree with Alice's view.

(ii) Explain the circumstance(s) under which you would disagree with Alice's view.

(a) "A fully diversified portfolio constructed by purchasing every risky asset in a market has a beta of zero." Do you agree or disagree with the statement? Explain your reasoning.

Amy owns shares in Belmont Ltd. Currently Belmont shares are priced at $48.50 per share in the stock market. The company expects its dividend to grow at a constant rate of 5% per year forever. Its last dividend was worth $2.50. What is the value of the shares if Amy's required rate of return for the shares is 11% per year? Should Amy buy additional Belmont shares or sell all the Belmont shares she owned? Explain your answer.

Reference no: EM132984984

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