Question 7 (10 marks)

1. Total risk can be decomposed into systematic risk and unsystematic risk. Explain each of these components of risk and how they are affected by increasing the number of securities in the portfolio. (2 marks)

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2. The historical returns for the market and for Sakura Ltd, a firm in the share market is provided in the table below.

Year	Market Return (%)	Return on Sakura Ltd (%)
1	25.7	40.0
2	8.0	-15.0
3	-11.0	-15.0
4	15.0	35.0
5	32.5	10.0
6	13.7	30.0
7	40.0	42.0
8	10.0	-10.0
9	-10.8	-25.0
10	-13.1	25.0

1. Calculate the expected return on the market and Sakura shares. (1 mark)

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2. Calculate the standard deviation of the market returns and the standard deviation of the returns on Sakura Ltd. (1 mark)

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3. Determine the correlation coefficient between the market return and the return on Sakura shares and hence calculate the Beta coefficient for Sakura Ltd.

(2 marks)

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4. What is the compensation for bearing systematic risk? (2 mark)

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5. If the risk free rate is 5 percent would you consider the shares of Sakura Ltd as a good buy? (2 marks)

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