Question 1

A. Use an example to explain the relationship among total, systematic and unsystematic risks. (4 marks) B. Stocks RJR Limited and SJL Limited have the following probability distributions of expected future returns: Probability RJR Limited SJL Limited 0.1 -10% -27.5% 0.2 2% 4% 0.4 12% 18% 0.2 20% 22.5% 0.1 39% 32.5% Calculate, for stocks RJR and SJL, the: i. expected rate of return. (4 marks) ii. standard deviation. (8 marks) iii. coefficient of variation. (2 marks) C. Which stock should a potential investor opt for? Why? (2 marks)