B Instructions: Answer ALL questions in this section. (25 Marks each) QUESTION 1 A) As an Investment Advisor, your client indicates that he wants to eliminate the risks in his investment portfolio. I. Differentiate between systematic and unsystematic risk. (2 Marks) II. With the aid of a diagram, advise the client on as to the extent of his elimination and how he can reduce the level of risk in his portfolio. (4 Marks) B) Consider the following information: State of Economy Probability of State of Economy Digicel Rate of Return FLOW Rate of Return Boom 0.4 0.15 0.40 Average 0.2 0.09 0.10 Recession 0.4 0.05 -0.08 I. Compute the expected rate of return on each stock. (4 Marks) II. Compute the Standard Deviation of each stock (4 Marks) III. Which stock is most volatile? (3 Marks) C) Brianna holds the portfolio shown below. Using the responses in B, calculate the portfolios expected return. (3 Marks) Digicel $400,000 FLOW $300,000 D) Brianna is seeking to expand her portfolio and thinks these two stocks are good value. Assume a risk-free rate of 8% and a market rate of 12%, which stock should she add to the portfolio? (5 Marks) Stock Expected Return Beta CIBC 13% 1.5 SCOTIA 19% 2.5 QUESTION 2 After trading for 3 years, Steran Co. Ltd found that they encountered frequent cash flow problems. In order to keep track of cash and outflows, they decided to start preparing cash budgets. The following information on actual and projected costs and revenue is available. A) Prepare the companys cash budget for the January to April 2020. (15 Marks) Month Sales Purchases $ & October 2019 80,000 65,000 November 2019 60,000 45,000 December 2019 90,000 75,000 January 2020 50,000 35,000 February 2020 60,000 45,000 March 2020 70,000 55,000 April 2020 60,000 45,000 You are also given the following additional information: i. Based on past analysis, 20% of sales tend to be for cash while the remainder is normally settled as follows: 60% in the month following sales and 20% two months after sale. ii. Steran Co. Ltd normally pays 50% of the cost of purchases in the month of purchase and the remainder in the following month. iii. New equipment will be purchased for $9 000 in January and this will be paid for in equal instalments in January, February and March. Old equipment is expected to be sold for $2 500 in February. iv. Depreciation of new equipment will be 10% per annum and will be charged to the accounts monthly. v. Salaries will be $3 000 per month and utilities is expected to be $7 000 in January and is expected to increase by 10% each month after. vi. Selling expenses of 2% of sales will be paid in the month of sale and packing expenses of 3% of purchases will be paid in the month following the purchase date. vii. The firm will obtain a loan of $40 000 in March at an interest rate of 15% per annum. Interest will be paid on an equal monthly basis commencing in March. viii. The balance of cash on January 1, 2020 was $15,000. B) The management of Steran Co. Ltd has set a safety cash balance of $75,000. The standard deviation () of the daily cash balance during the last year was $45,500, and the transaction cost was $70. The company also has the opportunity to invest idle cash in marketable securities at an annual interest rate of 10%. Using the Miller-Orr model, what is the optimum cash balance the company should hold? (6 Marks) C) What should the company do if the actual cash balance drops to the lower limit or touches the upper limit? (4 Marks)