QUESTION TWO

A$.$ On January $2014$ Mr Kalaluka Mwansa invested in $1000$ shares worth K $16$ and held on to the investment for twenty $(20)$ months. The annual dividends per share were K$2$ in $2013$ and were expected to grow in value by $10$ percent per annum for the next three $(3)$ years and $5$ percent per annum thereafter.

Required

Compute the Annual Holding Period Yield $($

Y$)$ for Mr Kalaluka Mwansa.

$(8$ Marks$)$

B$.$ The line that reflects the combination of risk and return available on various alternative investments in the market is called the Security Market Line $($SML$).$ It is also observed that investors usually increase their required rate of return as perceived risk increases. With the help of diagrams describe the relationship between risk and return in relation to movements along the SML$,$ change in slope of the SML and shift in the SML$.$

$(13$ Marks$)$

$[$Total: $25$ Marks$]$

QUESTION THREE

A$.$ Investors are believed to be rational, that is if everything else is the same, they would rather go for investments that offers greater certainty. On the other hand, uncertainty is a function of a number of variables. Discuss the variables that courses uncertainty in the expected rate of return.

$(16$ Marks$)$