Alice Paints Co. Ltd

Alice Paints has been quite successful and has $1,500,000 cash to be invested. The management team have developed four potential investments in addition to leaving the cash in a low interest deposit. The four new opportunities are:

1. Purchase some shares of a good stock (30% risk of total loss, 15% potential return) 2. Invest in the research and development of a new product (40% risk of total loss, 60% potential

return) 3. Buy a selection of corporate bonds (10% risk of total loss, 5% potential return) 4. Buy a selection of US or Canadian government bonds (called T-bill) (1% risk of total loss)

Leaving the money in a low interest deposit is virtually riskless.

There are a few banks in Canada which offer low interest deposit (called GIC). The management team needs to decide to buy a 5-year term deposit or a 10-year deposit. And they need to decide to buy Canadian 10-year T-bill or US 10-year T-bill.

The financial manager of Alice Painting aimed at diversification and risk management. These are:

1

1. Invest a maximum of 40% of the total cash in any one of the four new opportunities to ensure some risk control.

2. Invest at least $100,000 in each of the four new opportunities to ensure some diversity.

3. Limit the total potential loss, on average, to $300,000, based on the risk factors indicated.

4. The total investment of bonds is a half of the total investment.

5. Ensure the highest return possible.

Assume you are a new hired business analyst in Alice Painting. You need to write a memorandum to summarize the case.

The memorandum will recommend the appropriate mix of the four investments and note how much money, if any, should be left in the low interest deposit. Also, how would this mix change, and what would happen to potential return, if Alice Painting decided to take a more conservative approach and limit the total potential loss to $150,000.

You must state which Canadian Banks term deposit that you recommend Alice Painting to purchase and if they should buy Canadian 10-year T-bill or US 10-year T-bill. And why? (Hint: you need to find a Canadian banks term deposit rate and US or Canada T-bill rates).

Reference is required and must be written in APA format.

Format of the assignment:

MEMORANDUM

DATE: TO: Financial Division, Alice Painting FROM: Your name SUBJECT: Investment Decision A paragraph or two about the nature of the project Over the next few paragraphs discuss your results and recommendations. Include an appendix where you will put your relevant ta