Question

3.1 The following table shows possible sales levels a company is projecting for the next financial period. (5 marks)

Calculate the expected return for the above distribution of possible sales levels.

3.2 Suppose you are investigating the possibility of acquiring share of one company for your personal portfolio. You have narrowed down your search to two shares, X and Y and you wish to choose the one that carries the least risk. The standard deviation of share X is 10% and that of share Y is 25%. Which share should you choose and why would you choose it? (3 marks)

3.3 You are building your personal portfolio of investments which is currently comprised of one stock, A. You plan to buy one other share for now but wish to diversify your portfolio in terms of risk. Stock A, has a beta of -0.50. The two shares you are considering, shares B and C has the following betas associated with them:

Stock B : 0.50 Stock C: -0.10

Indicate which stock would you choose to diversify your risk, also briefly discuss why. (4 marks)

\begin{tabular}{|l|l|} \hline Price & Probability of occurrence \\ \hline R200 & 20% \\ \hline R250 & 50% \\ \hline R500 & 20% \\ \hline R900 & 10% \\ \hline \end{tabular} \begin{tabular}{|l|l|} \hline Price & Probability of occurrence \\ \hline R200 & 20% \\ \hline R250 & 50% \\ \hline R500 & 20% \\ \hline R900 & 10% \\ \hline \end{tabular}