Question
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
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]
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started