15 Marks) - Question Five (a) Discuss what is meant by excess return and risk premium (b) A project is expected to generate.net cash flows of Tshs 100 million in each of year 1 and 2: Its beta will be 1.5 throughout its life. The risk free interest rate is 10 percent, and the expected retum on the market is 18 percent. Required: Calculate the 6) Present value of the cash flows 12 Marks) 12 Marks) (ii) Certainty equivalent of the cash flows (ill) Ratios of the certainty equivalents to the expected cash flows (that is, o and 12 Marks) (0) Securities A, B and C have standard deviations of retums of 9%, 13%, and 6% respectively. The expected return on market portfolio is 30% with standard deviation of return of 10%. The risk free rate is 6%. Find the expected retum on a portfolio made up of 30% of security A and 70% of security C if the correlation coefficient between A and C's returns is - 0.8. 110 Marks) Assume that your father has just won a lottery for Tshs 10 million. Given the awareness created by the promotion campaign being undertaken by the CMSA and the Dar es Salaam Stock he is considering placing the entire funds either in shares of the Tanzania Tea Packers (TATEPA) or in shares of Tanzania Cigarettes Company (TCC). Knowing that you are a business student in the Faculty of Commerce and Management at the University of Dar es Salaam n MBA student, he trusts you and has been using you as his financial adviser. When he tells you about this plan you suggest two alternative investment approaches. (1) Invest some of the money in TATEPA and some in TCC to give him at least a smal degree of diversification. The proportions you suggest are as given below Portfolio Proportion of portfolio invested in (%) TATEPA TCC 1 25 75 2. 75 25 3 90 10 (2) Invest the entire sum in a broad range of investments to reduce unsystematic risi This portfolio is expected to produce a return of 23 percent per year with a standar deviation of 6 percent To assist your father make a final decision, you do some research and come up wi forecasts for shares in TATEPA and TCC given various states of the economy as give below: State of the economy Probability Returns on shares in (%) TATEPA TCC 15 Marks) - Question Five (a) Discuss what is meant by excess return and risk premium (b) A project is expected to generate.net cash flows of Tshs 100 million in each of year 1 and 2: Its beta will be 1.5 throughout its life. The risk free interest rate is 10 percent, and the expected retum on the market is 18 percent. Required: Calculate the 6) Present value of the cash flows 12 Marks) 12 Marks) (ii) Certainty equivalent of the cash flows (ill) Ratios of the certainty equivalents to the expected cash flows (that is, o and 12 Marks) (0) Securities A, B and C have standard deviations of retums of 9%, 13%, and 6% respectively. The expected return on market portfolio is 30% with standard deviation of return of 10%. The risk free rate is 6%. Find the expected retum on a portfolio made up of 30% of security A and 70% of security C if the correlation coefficient between A and C's returns is - 0.8. 110 Marks) Assume that your father has just won a lottery for Tshs 10 million. Given the awareness created by the promotion campaign being undertaken by the CMSA and the Dar es Salaam Stock he is considering placing the entire funds either in shares of the Tanzania Tea Packers (TATEPA) or in shares of Tanzania Cigarettes Company (TCC). Knowing that you are a business student in the Faculty of Commerce and Management at the University of Dar es Salaam n MBA student, he trusts you and has been using you as his financial adviser. When he tells you about this plan you suggest two alternative investment approaches. (1) Invest some of the money in TATEPA and some in TCC to give him at least a smal degree of diversification. The proportions you suggest are as given below Portfolio Proportion of portfolio invested in (%) TATEPA TCC 1 25 75 2. 75 25 3 90 10 (2) Invest the entire sum in a broad range of investments to reduce unsystematic risi This portfolio is expected to produce a return of 23 percent per year with a standar deviation of 6 percent To assist your father make a final decision, you do some research and come up wi forecasts for shares in TATEPA and TCC given various states of the economy as give below: State of the economy Probability Returns on shares in (%) TATEPA TCC