Question
Your client is considering purchasing some shares in the telecommunication sector and is investigating Light Speed Ltd. (LSL) and DuDo Ltd. (DDL) as suitable companies
Your client is considering purchasing some shares in the telecommunication sector and is investigating Light Speed Ltd. (LSL) and DuDo Ltd. (DDL) as suitable companies shares to add to her fully diversified portfolio of investments. She would like you to review the historical performance and future prospects for both companies. You have prepared the following information for your client so that she could use to make her investment selection: Light Speed Ltd DuDo Ltd Current share price $3.25 $40.70 Current Dividends per Share $0.25 $5.10 Current beta 0.70 1.6 Light Speed Ltd DuDo Ltd Probability of Return Likely Return over next 12 months Probability of Return Likely Return over next 12 months 0.25 1% 0.05 5% 0.40 10% 0.10 3% 0.35 13% 0.50 13% 0.35 19% Other information: Current risk free rate of return: 2% p.a. Current return on market portfolio: 10% p.a.
REQUIRED:
a) Calculate the expected return for each share that reflects your predictions for the next 12 months. (4 marks)
b) Calculate the required return for each share, given its risk characteristics. (4 marks)
c) Which of the above companys shares (if any) would you suggest your client to buy based on your calculations, in (a) and (b) above? Explain your reasons. (4 marks)
d) Graphically draw the expected return and required return on a return / risk graph. Label all aspects of the graph. (5 marks)
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