On your first day as an intern at Tri-Star Management Pty Ltd the CEO asks you to analyse the following information: Corporate Finance Assignment, NUS, Singapore

Problem C: 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 Sam’s 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 Sam’s Grocery as 0.52. You are provided a series of questions to guide your analysis.

Assignment
⦁ Using the probabilistic approach, calculate the expected rate of return for Tech.com, Sam’s Grocery, and the ASX 200 Index.

⦁ Calculate the standard deviations of the estimated rates of return for Tech.com, Sam’s Grocery, and the ASX 200 Index.

⦁ Which is a better measure of risk for the ordinary share of Tech.com and Sam’s Grocery – the standard deviation you calculated in Question 2 or the beta? Why?

⦁ Based on the beta provided, what is the expected rate of return for Tech.com and Sam’s Grocery for the next year?

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

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

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