Page 137 - CAPE Financial Services Syllabus Macmillan_Neat

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FINANCIAL SERVICES STUDIES
UNIT 1 - PAPER 02

KEY AND MARK SCHEME

5. (a) Explanation of two (2) additional items of information that
would have added value to Moler’s report.

Moler should have stated the standard deviation of asset
returns. (1) Standard deviation is used as a measure of risk
and is widely accepted within finance as such a measure. (1)

Additionally, she should have stated the weighting of each
asset class. (1) This would add value to the board analysis
of the portfolio’s performance. (1)

The above list is not exhaustive.

1 mark for stating measure
1 mark for explanation

(b) Explanation on the calculation of portfolio return

The calculated portfolio return is not an arithmetic mean
but rather a weighted mean. (2)

The formula is = ∑=1 , where w represents the weight of
an asset in the portfolio and R represents the return. The
return of the portfolio is dependent on the weight of an
asset and its contributing return. (4)

1 mark for each step in the calculation
2 marks for explanation

(c) Explanation of the capital asset pricing model and of how it
might be appropriate for Moler’s report.

Reports such as this would have benefitted from a comparison.
Moler has shown actual results. However, if an estimated
result could be shown of what investors minimum expected
return is given the level of risk, this would contribute
significantly to the assessment of the portfolio’s
performance. (5)

Moler has shown Beta in her report but has not given an
explanation of the significance of Beta. Beta is a measure
of systematic risk in the market. Additionally, market risk
premium needs to be stated to give investors and the board
better information regarding asset class selection. The
capital asset pricing model (CAPM) would allow Moler to
review the portfolio’s performance, by highlighting risk of
each asset class. More risk should be equivalent to more
return. (5)
1 mark for stating point
3 marks for explanation