Question

a) Doolittle Ltd has recorded the following end-of-year share prices:

Month Price

2009 $8.89

2010 $8.21

2011 $7.45

2012 $8.45

2013 $9.06

2014 $9.91

2015 $10.80

2016 $12.45

*Note: The company paid no dividends in these years.

i. Calculate the yearly returns for this share.

ii. Calculate the standard deviation of returns for the company's shares.

b) Fortissimo Group has estimated the potential returns that may be achieved from a project, together with the likelihood of such returns occurring, detailed in the table below:

Possible Returns Probability of Occurrence

-5% 15%

3% 30%

8% 40%

21% 15%

Fortissimo Group has also estimated that the risk of this project, measured with Beta, is 0.6. The market portfolio that they have chosen has returned an average of 9% per annum over the past 5 years. The current risk free rate is 2%.

i. Calculate the expected return and the standard deviation of returns for this investment

ii. Identify whether Fortissimo Group should invest in this project. Provide a reason for your decision.