QUESTION 2

a.Define what is meant by a pure discount bond. (2 marks)

b. An Investment Advisor is valuing Pick and Pay by discounting the cash flows using the cost of capital derived from a beta of 0.85. An Analyst at Motswedi Securities had provided 0.85 as the average industry beta for the Retail. Explain conditions under which you will recommend for beta of 0.85 to be used and the conditions in which you will be against its use. (6 marks)

c. Raditsebe, an Analyst at Barclays Bank Investment Division, has been monitoring the performance of stocks of Furnmart, Metsef, and Choppies and has compiled the following;

	Beta	STD	Forecast to December 2016
			Dividend	Share price
Furnmart	0.45	35%	P0.50	P45
MetSef	1.45	40%	0	P75
Choppies	-0.20	40%	P1.00	P20

The markets standard deviation is 18%. Using the risk-free rate of 2.0% and an expected market return of 9.5%, what is the expected return of each stock? (9 marks)

d. Based on your calculations above describe the relationship between a firms return and its beta. (3 marks)