MTC NAM I: 94% 01 :00 THIS QUESTION PAPER CONSISTS or _10_ PAGES (Including this front page) QUESTION 1 [25 Marks] ABC (Pty) Limited is a company operating in the retail industry within Namibia. The company is privately owned and you have been recently appointed as the Financial Director (FD) of the company. ABC (Pty) Limited wishes to invest in two shares that have the following risk/return profiles: Economic State Probability Expected Return Share A Share B 1 0.3 2% 15% 2 0.5 10% 22% 3 0.2 12% >2% The risk free rate is three percent; the market return is twelve percent; the standard deviation of expected market return is six percent; the covariance of share A returns with those of the market is 25.2 and the covariance of share B returns with those of the market is 39.6. Required: 3) Calculate the standard deviation of shares A and B; the covariance of returns between the two shares, and the correlation between share A and share B (10 marks) b) Determine the expected return of a portfolio consisting of forty percent of share A and sixty percent of share B together with the risk of the portfolio (3 marks) c) Would advise ABC (Pty) Limited to purchase the portfolio? Justify (3 marks) cl) Calculate the required return for shares A and B according to the Capital Asset Pricing Model and advise which share ABC (Pty) Limited should invest in (5 marks) e) Describe any two limitations in using the Capital Asset Pricing Model for capital budgeting decisions (4 marks)