RISK AND RETURN TUTORIAL QUESTION [35 MARKS] STANLIB Namibia (Pty) Ltd was established in 1993 as a joint venture between Standard Bank Namibia and STANLIB South Africa, to provide investment management services to Namibian institutional, corporate and retail clients. STANLIB is a multi-specialist asset manager that connects retail and institutional clients with multiple investment opportunities across asset classes and markets. Their clients are mainly institutional and corporate investors with short-term cash management and medium-to-long-term investment needs. Their retail clients comprise individual investors, high-networth individuals, clubs, small business associations, and community cooperatives. In an increasingly dynamic and interconnected world, their understanding of the complex connections of markets, industries, sectors and global events gives them a competitive edge to adapt to the environment and make more informed investment decisions that lead to better investment outcomes. STANLIB manages and administers N$600 billion (USD 42 billion) (as at 31 December 2018) assets for more than 500 000 retail and institutional clients. They operate in eight African countries and in key developed markets globally. STANLIB Namibia (Pty) Ltd is looking to expand its interests by purchasing interest in either WALTONS or BIDVEST Namibia. The management of STANLIB Namibia (Pty) Ltd believes that the expected returns from the acquisition of BIDVEST Namibia are dependent on the state of the economy. The following information is made available: Estimated Returns State of economy Probability of occurrence WALTONS BIDVEST MARKET Boom 0.3 16% 20% 14% Recession ?? 10% 12% 8% Depression 0.3 2% 0% 6% Book value in million N$12m N$8m Market value in million N$8m N$12m Covariance with the market 0.0024 0.0023 - The risk-free rate is 5% and there is no company or personal taxation. REQUIRED: MARKS a) Calculate the standard deviation for WALTONS, BIDVEST and the market (9) b) If STANLIB could only invest in one company, which one would you select? Motivate your answer with appropriate calculations. (7) c) Determine the expected return and the standard deviation of the portfolio, assuming that STANLIB invests in both WALTONS and BIDVEST to form a portfolio.(7) a) Determine the required returns for WALTONS and BIDVEST using the Capital Asset Pricing Model (CAPM) (6) b) Discuss any three (3) limitations of the Capital Asset Pricing Model (CAPM) (6) TOTAL MARKS 35