Mr. Ulimwende is currently holding a portfolio consisting of shares of four companies quoted on the Uganda Stock Exchange as follows:

Company

Number of shares held

Beta equity co-efficient

Market price per share

Expected return on equity in the next year %

A B C D

20,000 30,000 30,000 20,000

1.12 0.89 0.70 1.60

65 50 45 80

18 23 11 17

The current market return is 14% per annum and the treasury bills yield is 9% per annum. Required: Explain whether or not Ulimwende should change the composition of his portfolio. ( 12 marks)

b. What is the price of a European put option on a non-dividend paying stock when the stock price is sh. 69, the strike price is sh. 70, the risk free rate is 5% per annum, volatility is 35% per annum and the time to maturity is sx months. (4maks) c. Critically evaluate the factors that will affect (b) above. (4 marks)