Mr. Raditsebe recently retired from Botswana Power Corporation where

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

Question 1

Mr. Raditsebe recently retired from Botswana Power Corporation where he had been working for 20 years and has asked you to help him identify investment opportunities in the domestic market. Below is the state of the economy with the potential assets to be invested in, asset X and asset Y. NB: The returns are already converted from the percentages.

 

State of the Economy Return on X Return on Y

Depression -0.20 0.05

Recession 0.10 0.20

Normal 0.30 -0.12

Boom 0.50 0.09

 

Calculate:

 

i. Expected return for X and Y [4 marks]

ii. Variance for X and Y [8 marks]

iii. Standard deviation on the given assets. [4 marks]

iv. If the overall market standard deviation is 18% and the risk-free rate is 2%, while the expected market return is 9.5%, find the expected return using CAPM.

[4 marks]

 

Question 2

 

Mr. Raditsebe also wants to invest in two stocks, stock A and B and has been provided the following information on the stocks. Use the information to answer the questions that follow:

 

State of Economy Probability of State of Economy Rate of Return on stock A Rate of Return on stock B

Recession 0.10 5% -10%

Normal 0.60 9% 12%

Boom 0.30 10% 20%

 

a) What is the expected return on stock A and stock B? (6 marks)

b) What is the variance and standard deviation for stock A and stock B? (10 marks)

c) Differentiate between systematic risk and firm specific risk (4 marks)

 

 

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