Question 1

Your firm recently divested some non-core assets and now has a significant amount of excess cash. Barry Allen, the CEO, is considering investing in either Sizzle

Technologies Engineering Limited ("STE") shares or 10-year Super Government Securities ("SGS") or a combination of both. He knows that you are studying a

Finance course, and he is seeking your advice.

Based on your research, the following market data was obtained:

Information relating to STE,

DateShare Price Dividends per Share (cents)

31-Dec-133.5915

31-Dec-143.2515

31-Dec-152.8315

31-Dec-163.3015

31-Dec-173.3715

31-Dec-183.7215

As at December 2018, beta is 0.72.

Information

relating to SGS,

DateBond Price

31-Dec-13101.61

31-Dec-14106.21

31-Dec-1598.15

31-Dec-1697.08

31-Dec-17112.47

31-Dec-18104.94

The coupon rate is 2.75% per year and will mature in December 2023.

Other market data

Market risk premium = 5.5%

Inflation rate = 1.2%

(a) Calculate the annual returns for both STE and SGS for the 5 years 2014 to 2018.

(b) Calculate the historical arithmetic and geometric average returns of both STE and SGS over the last 5 years.

(c) Calculate the expected return for STE using the CAPM model as of December 2018.

(d) Discuss two (2) reasons why the expected return is different from the historical arithmetic average return.

(e) Calculate the historical variance and standard deviation of returns for both STE and SGS. You are expected to show your workings.

(f) Discuss the differences between systematic risk and total risk, and ascertain which measure of is more appropriate for the firm to use.

(g) Calculate the portfolio return (arithmetic average) and standard deviation of the following:

(i) Portfolio A: 20% in STE and 80% in SGS

(ii) Portfolio B: 50% in STE and 50% in SGS

(iii) Portfolio C: 80% in STE and 20% in SGS

(h) Discuss which portfolio in part (g) is appropriate for the firm. State the assumptions made in arriving at your answer.

Important Note: Please submit your Excel spreadsheets(if any) showing the computations, for

verification of your answers.