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CASE 1 Risk, Return, and the Capital Asset Pricing Model On your first day as an intern at Tri-Star Management Pty Ltd the CEO asks
CASE 1 Risk, Return, and the Capital Asset Pricing Model On your first day as an intern at Tri-Star Management Pty Ltd the CEO asks you to analyse the following information pertaining to two ordinary share investments, Tech.com and Sam's Grocery. You are told that a one-year Treasury note will have a rate of return of 5% over the next year. Also, information from an investment advisory service lists the current beta for Tech.com as 1.68 and for Sam's Grocery as 0.52. You are provided a series of questions to guide your analysis. Estimated Rate of Return Economy Probability Tech.com Sam's Grocery ASX 200 Recession 30% -20% 5% Average 20% 15% 6% 11% Expansion 35% 30% 8% 17% 15% 50% 10% 27% -49 Boom Task 1. Using the probabilistic approach, calculate the expected rate of return for Tech.com, Sam's Grocery, and the ASX 200 Index. 2. Calculate the standard deviations of the estimated rates of return for Tech.com, Sam's Grocery, and the ASX 200 Index. 3. Which is a better measure of risk for the ordinary share of Tech.com and Sam's Grocery - the standard deviation you calculated in Question 2 or the beta? 4. Based on the beta provided what is the expected rate of return for Tech.com and Sam's Grocery for the next year? 5. If you form a two-share portfolio by investing $30,000 in Tech.com and $70,000 in Sam's Grocery, what is the portfolio beta and expected rate of return? 6. If you form a two-share portfolio by investing $70,000 in Tech.com and $30,000 in Sam's Grocery, what is the portfolio beta and expected rate of return? 7. Which of these two-share portfolios do you prefer? Why
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