A. Explain the impact of the following on future cash flows

i. Inflation (2 marks)

ii. A rise in interest rates. (2 marks)

B. Differentiate between the covariance and the correlation coefficient. (2 marks)

C. Explain how diversification can influence the risk profile of a firms assets. (5 marks)

D. Mangroove Jubi Ltd share has the following risk profile for its three securities:

SHARE	Beta Factor
FFZ Ltd	1
DXY Ltd	0.5
CFR Ltd	-1.2

Required:

i. Interpret the risk of each share relative to the market. (4 marks)

E. A stock has a required rate of return of 11%, the risk free rate is 7% and the market risk premium is 4%.

Required:

i. Calculate the stocks beta. (2 marks)

ii. If the market risk premium increased to 6%, calculate the stocks required rate of return. Assume the risk free rate and the beta remain unchanged. (3 marks)

[TOTAL: 20 MARKS]