You were desperately looking for a proper job in the Accounting/Finance sector after your graduation. After a few rejections a final breakthrough came to you. You are offered a financial analysts job at SysConsult International, an Investment Consulting firm. This firm manages funds and investments on behalf of its clients. The firm listens to its clients and follow their instructions when choosing the shares.

The first week of your new job was full of meeting people and attending a series of training sessions. On the first day of the second week, the CEO asks you to analyse the following information pertaining to two ordinary share investments, Logical IT and Safeworth 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 Logical IT as 1.70 and for Safeworth Grocery as 0.60. Following data was presented to you. You are also provided a series of questions to guide your analysis.

Economic Condition	Probability	Estimated rate of Return from Investment
		Logical IT	Safeworth Grocery	ASX 200
Recession	30%	-20%	5%	-4%
Normal	20%	15%	6%	11%
Expansion	35%	30%	8%	17%
Boom	15%	50%	10%	27%

You have been asked to provide correct answers to the following questions:

1. One particular client does not understand why high return should be associated with high risk. Your boss wants you to explain in simple language the connection between risk and return.

2. The client also asks: Does high risk always give you high return? Can you respond to the client and cite two examples when high risk may not give you high return?

3. Using the probabilistic approach, calculate the expected rate of return for the Logical IT, Safeworth Grocery, and the ASX 200 Index.

4. Calculate the standard deviations of the estimated rates of return for Logical IT, Safeworth, and the ASX 200 Index. (Hint: Use Expected return calculated in 3 above as the Mean return)

5. Which is a better measure of risk for the ordinary shares of the IT firm and the Grocery firm the standard deviation you calculated in Question 4, or the beta? Why?

6. Based on the beta provided, what is the expected rate of return for Logical IT and Safeworth Grocery for the next year? Which company will have higher value if their future cash flows are identical? Why?

7. Using the CAPM what will be the percentage change in the share prices of each firm if the ASX 200 share index falls by 5%?

8. If you form a two-share portfolio by investing $30,000 in Logical IT and $70,000 in Safeworth Grocery, what is the portfolio beta and expected rate of return of the portfolio-A?

9. If you form a two-share portfolio by investing $70,000 in Logical IT and $30,000 in Safeworth Grocery, what is the portfolio beta and expected rate of return of the portfolio-B?

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