You are presented with the following currency quotations from the newspaper by Investment Corporation limited for a Consultancy work for a fee of USD 400 to help assess the possibility of opportunities to take advantages of profit:

QUOTATIONS

BID

ASK

ARUSHA BANK ($/)

$1.9712

$1.9717

KISONGO BANK ($/)

$1.4738

$1.4742

NJIRO BANK (/)

1.3310

1.3317

a) Describe arbitrage opportunity and state reasons leading to it.

b) Determine if there is any arbitrage opportunity from these quotations.

c) Discuss whether there is possibility of making profit from these quotations

i) A company want to estimate its required rate of return using Capital Asset Pricing Model (CAPM). The risk free rate is 4% and the market return is 12%. The firm has a Beta value of 1.30. Furthermore, an investor who bought the stock for TZS 5.60 last year expects to sell it for TZS 6.60 this year. The stock paid a Cash Dividend of TZS 0.30 recently.

Required:

a) Calculate expected holding period return the investor would receive and the required rate of return of the stock.

b) In your opinion, is the stock fairly priced, undervalued or overvalued?

ii) You are considering the three securities listed below.

STOCK A

STOCK B

STOCK C

Expected Return

9.9%

9.4%

8.6%

Standard Deviation

4.5%

8.1%

2.5%

Based on the information provided, which stock would you prefer and why?