QUESTION 1 (25 MARKS) Sun Leisure World Corporation (referred to as SLWC henceforth) is a Thai private company that was established in the early 1990s. The company organizes sightseeing tours across Thailand but operates mainly on the island of Phuket. From Phuket, trips ranging from one to three days are organized to other islands across the Adaman Sea. SLWC has had significant success in their business of late. With the general strengthening of the US dollar post the US elections, Thailand, and SLWC in particular, has seen a surge in tourists. This recent success has given SLWC surplus cash. SLWC has allocated a total of TBH10 million (Thai Baht) for future investments. Management has decided that they would like to invest in a portfolio of equities. The financial manager was tasked with researching potential investment targets. The financial manager then approached the CEO with the following investment options: Asian Hotel PCL (referred to as AHP henceforth) and Ratchaburi Electricity Generating Holding PCL (referred to as REGH henceforth) were selected as possible options. The following salient information was available to the financial manager: AHP operates two business segments: 1. Room segment, which is the operation of hotel accommodation in Asia Hotel Bangkok, Asia Airport hotel, Asia Pattaya hotel and Asia Cha-am hotel; REGH AHP Return 2013 11.49% 7.88% 2014 10.87% 3.79% 2015 5.27% 7.20% 2016 10.07% 0.07% Share Price 2013 49.00 85.50 2014 58.75 89.00 2015 47.50 83.25 2016 50.00 68.72 PE Ratio 2013 10.63 9.55 2014 13.06 6.37 2015 28.06 9.69 2016 17.92 18.24 2. Food and beverages segment, which is the operation of the restaurants for hotel customers including Thai and international restaurants, bars and lounges, and rental and services segment, which is the rental of shopping malls. Analysts have concluded that AHP has significant potential growth in the near future due to the increase in tourism. REGH is a leading Independent Power Producer in Thailand, with an ambitious vision, aiming to be a leading value-oriented integrated energy company in Asia-Pacific. Founded on 7 March 2000, the Company has the issued and paid-up capital of THB14.5 billion and the Electricity Generating Authority of Thailand (EGAT) is its major shareholder with 45% equity stake. The power industry has grown significantly, with a number of competitors entering the market. Furthermore, research has shown that the industry is now saturated. REQUIRED MARKS (a) Calculate the expected return of each of the companies. 4 (b) Calculate the standard deviation of returns for each of the companies. 10 (c) If you could only invest in one share, which one would you select? Motivate your answer and show all calculations. 6 (e) Explain what would make diversification effective in minimising the portfolio risk. 5 TOTAL MARKS 25