Risk, Return, and the Capital Asset Pricing Model

On your first day as an intern at Tri-Star Management Pty Ltd the CEO asks you to analyse the following information pertaining to two ordinary share investments, Tech.com and Sams Grocery. You are told that a one-year Treasury note will have a rate of return of 5% over the next year. Also, information from an investment advisory service lists the current beta for Tech.com as 1.68 and for Sams Grocery as

0.52. You are provided a series of questions to guide your analysis.

1. Using the probabilistic approach, calculate the expected rate of return for Tech.com, Sams Grocery, and the ASX 200 Index.

2. Calculate the standard deviations of the estimated rates of return for Tech.com, Sams Grocery, and the ASX 200 Index.

3. Which is a better measure of risk for the ordinary share of Tech.com and Sams Grocery the standard deviation you calculated in Question 2 or the beta?

4. Based on the beta provided, what is the expected rate of return for Tech.com and Sams Grocery for the next year?

5. If you form a two-share portfolio by investing $30,000 in Tech.com and $70,000 in Sams Grocery, what is the portfolio beta and expected rate of return?

6. If you form a two-share portfolio by investing $70,000 in Tech.com and $30,000 in Sams Grocery, what is the portfolio beta and expected rate of return?

7. Which of these two-share portfolios do you prefer? Why?

Estimated Rate of Return Economy Probability Tech.com Sam's Grocery ASX 200 Recession 30% -20% 5% -4% 20% 15% 6% 11% Average Expansion Boom 35% 15% 30% 50% 8% 10% 17% 27% Task