Question Two

The rates of return of stock A and the market portfolio for the 12 months are given below:

Month	1	2	3	4	5	6	7	8	9	10	11	12
Stock A (%)	10	15	18	14	16	16	18	4	4	14	15	14
Market Portfolio (%)	12	14	13	10	9	13	14	7	1	12	4	16

1. Compute the average return of stock A and the market. (3mks)
2. Determine the variance of the return of stock A and the market. (3mks)
3. Find the covariance between the return of stock A and the market portfolio.

(3mks)

4. Estimate the beta factor for stock A. (2mks)

Question Three

The table below shows the performance of two shares A and B under four different economic conditions and their associated probabilities of occurrence:

Economic Condition	Rate of return %	Rate of return %	Probabilities	Probabilities
	A	B	A	B
Growth	18.50	16.50	0.25	0.45
Expansion	12.75	14.00	0.25	0.20
Stagnation	1.25	1.80	0.25	0.20
Recession	-6.00	-4.50	0.25	0.15

Calculate:

1. The expected rate of return for shares A and B. (6mks)
2. The standard deviation of the returns for shares A and B. (8mks)
3. The coefficient of variation of returns for shares A and B. (4mks)
4. Advise an investor on the preferred share. (2mks)