Nur Aisyah Hanin Binti Razali 2021640438

Mid Term Test

Name : Nur Aisyah Hanin Binti Razali

ID No. : 2021640438

Class : AA7002

Course : FIN 768

Due : 1st Dec 2022

Nur Aisyah Hanin Binti Razali 2021640438

Question 1
Your friend calls you and suggest that you invest in Bodysoul Wellness. After evaluating the
financial reports, you found the following expected return for the company. Compute the
expected return and standard deviation for Bodysoul Wellness and decide if this company is a
good investment on the risk and return computed.

N Possible Rate of return Probability Expected Return Variance

1 -0.6 0.05 (-0.6)(0.05) 0.05(-0.6-0.12)2
= -0.03 = 0.02592
2 -0.3 0.2 (-0.3)(0.2) 0.2(-0.3-0.12)2
= -0.06 = 0.03528
3 -0.1 0.1 (-0.1)(0.1) 0.1(-0.1-0.12)2
= -0.01 = 0.00484
4 0.2 0.3 (0.2)(0.3) 0.3(0.2-0.12)2
= 0.06 = 0.00192
5 0.4 0.2 (0.4)(0.2) 0.2(0.4-0.12)2
= 0.08 = 0.01568
6 0.8 0.1 (0.8)(0.1) 0.1(0.8-0.12)2
= 0.08 = 0.04624
0.12 0.12988

Expected return = 0.12 / 12%

Variance = 0.12988
𝟐
Standard Deviation = ξ𝟎. 𝟏𝟐𝟗𝟖𝟖
= 0.36 / 36%
I would consider in investing in this company because, from what has been calculated, the
expected return is more than 10% with a risk of less than 40%. This shows that this is a low-
risk investment, and to have such a high return of 12% it would be a golden opportunity.
Nur Aisyah Hanin Binti Razali 2021640438

Question 2
a) Differentiate the primary market from the secondary market and discuss how the
primary market is dependent on the secondary market

One of the difference is from the sales of the bond, wherein primary markets all the
proceed will go to the issuing unit. This is because the primary market is participated
by a company that newly issued the bond or shares to the Public. Their goal is to obtain
new capital for the company. While on the other hand, the secondary market share sales
will directly go to the current shareholders. This is usually done by active traders who
already obtain the shares or new traders. The investment activities will only happen
within the shareholders. The primary market is dependent on the secondary market as
the primary is a new market while the secondary is considered an existing market. The
new markets will create a new opportunity in sales while the old market would help it
to be sold and conceal its profit.

b) Discuss why a policy statement is important in an investment process.

A policy statement is a sacred document in the investment process. It is an important

document that obtained all the company details, background, investment terminologies
and other information as a shareholder should know. The purpose of the documents is
to create a concrete foundation of trust within the shareholders and the managers. This
will be as a benchmark for the investors to follow, learn and acknowledge in order to
avoid in involving in a bad investment. A policy statement will be a document that will
become the guideline for the investor to know all about their investment. These details
should be publicly posted so that the current investor and potential investors would be
equipped with the company condition and situation. As for example, if we intend to buy
a car, we should know where the car is manufacture, whether the car is able to be use
for a long term and can it be hold for a long distance or heavy used. This is the same as
in the investment, the policy statements will withhold all information that will help in
influencing the investors to invest. The policy statements also can help in the review of
the investment made by the investors. It will also be a guideline for the investors to
monitor the ongoing investment and predicting the future return and risk obtained in
the investment.