Question 3

You just graduated with MBA in Accounting and Finance from the University of Professional Studies and are employed by JEK Investments Ltd, a brokerage firm in Ghana. Kweku The Don, an illiterate businessman, visited your firm for a piece of investment advice and possibly make some investments. Although an accomplished businessman, he was advised by hisson to buy some shares on the Ghana Stock Exchange in other to diversify his portfolio. Your boss has asked you to consider either Cronox Industries or Zealous Incorporated The share prices and dividends for the two companies and the returns on the Ghana Stock Exchange are shown below for the period 2016 2021.

	Cronox Industries		Zealous Incorporated
Year	Stock price	Dividend (GH)	Stock price	Dividend (GH)	GSE Returns (Market Returns)
2016	7.62	-	55.75	-	-
2017	12	0.90	60.00	2.25	0.07
2018	10.75	0.95	57.25	2.50	0.12
2019	17	1.00	48.75	2.75	0.08
2020	15.75	1.06	52.30	2.90	0.23
2021	17.25	1.15	48.75	3.00	0.18

a. Based on your understanding of Risk and Return in Financial Management, explain to Kweku The Don what portfolio means in simple terms and why he should heed his son's advice.

b. Use the data given to calculate the annual returns for Cronox, and Zealous using 2016 as the base year.

c. Compute the average returns (Arithmetic Average) for each of the stocks over the five-year period (2017-2021)

d. Calculate the risk (standard deviation of returns) for both Cronox and Zealous.

e. Calculate the coefficient of variation for both companies

f. Compare the two companies regarding risk and returns and advise Kweku The Don on which one to invest in.

g. Calculate the covariance and the correlation coefficient between the two stocks

h. Assuming Kweku the Don wants to invest the same amount in each of the stocks, what will be his portfolio risk and portfolio return

i. Compute the beta for both Cronox and Zealous

j. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is riskier? Explain.

k. Based on your knowledge of the market beta, do you think Kweku The Don will be adequately compensated for the level of risk he is willing to assume?

l. Assuming the risk-free rate is 5%, what is the expected rate of return using the CAPM?