INANCIAL MANAGEMENT RI TOPIC 11 INTRODUCTION TO RISK AND RETURN QUESTION 1 November 2020 Question Five B (ii) (i) Risk-return trade off in the context of investments. Asserts that for a rational investor, the higher the risk, the higher the return demanded to compensate for additional risk assumed. The lower the risk, the lower the return demanded from the investment RISK RETURN TRADEOFF RETURN QUESTION 2 November 2019 Question 3 A a) Differences between a systematic risk and unsystematic risk COMPARISON SYSTEMATIC RISK UNSYSTEMATIC RISK BASIS Meaning Refers to the hazard which _| Refers to the risk associated is associated with the with a particular security market or market segment | company or industry Protection types Asset allocation interest __| Portfolio diversification risk, Business risk and financial Market risk and purchasing__| risk power risk Nature factors affect Controllable internal factors Uncontrollable external __| only a particular company _| Page 231FINANCIAL MANA\ NT REVISION KIT factors large number of securities in the market QUESTION 3 November 2019 Question 3 (B) b) i) The standard deviation of security Y and security Z returns MeanY = 0.1 X10 +0.2x12+0.35 x8+ 0.05 x 15 + 0.15 x 14+0.15 x9 = 10.4% Standard deviation of security Y by {o2a0¥ + 0.2(12)? + 0.35(8)? + 0.05(15)? + 0.15(14)? + 0.15(9)? — 10.4? = V10 + 28.8 + 22.4 + 11.25 + 29.44 + 12.15 — 108.6 = VI14 — 108%) =v5.4 = 2.32% Mean Security z AD: 0.10 x 8 +0.2 x 10 +035% 7+ 0.05 x12 +0.15+11+015 x8 =08+2+2.45 + 0.6 + 1.65 +1.2 = 8.7% Standard deviation z SS ore + 0.2(10)? + 0.35(7)? + 0.05 (12)? + 0.15(11)? + 0.15(8)? — 8.77 =V78.5—75.69 =V281 = 1.68% b) ii) The relative risk of security Y and security Z Standard Deviation Coefficient of variation = x 100% Mean —_ 2.32 Coefficient of variation = 7 x 100% = 22.31% www.someakenya.com. Contact: 0707 737 890 Page 232MENT REVISION KIT 1.68 Coefficient of variation = [= x 100% = 19.31% Advise to the investor on which of the two securities to invest in Invest insecurity z because it has the least risk. QUESTION 4 November 2019 Question 4 (C) ©) i) Portfolio's expected rate of return Expected return Coral Ltd =0.2x 16 +06 x 12+0.2x8 = 32472416 <12% B = 0.2x 144016 x 10 + 0.2 x 6 “Expected return reef Ltd 2BF6 +12 = 10% Portfolio return (Seo00 **2%)* (Sooca0* 2%) = 7.2% + 4.0% = 11.2% ii) Portfolio's actual risk using the mathematical model. = ATA=A]P—A)] Bl B-8[PB-B) P(A — ABB) ee 020 i6y 4 32 [ap 28 | 1568 224 2] 0 0 }io} 2 | 1368 0.00 ea is e| 4 a2 | 6 | 32 | 0.868 416 £4 184 GA SD TS 19, | — Contact: 0707 737 890 Page 233FINANCIAL MANAGEMENT REVISION KIT Standard deviation reef LtdB = v7.84 = 2.8 Standard deviation coral Itd A = V6.4 = 2.53 Weight securtity A (W,) = 300,000 + 500000 = 0.6 Weight Security B (Ws) = 0.6 = 0.4 Actual portfolio risk = |W,252 + W363 + 2W,WCOVaew = V0.6" x 6.4 + 0.4? x 7.84 +2 x 0.4 x 0.6 x 6.4 = V2304 + 1.2544 + 3.072 = 257% 9 QUESTION 5 November 2018 Question Five C 50)i) Expected return A = (A) A= 03x12 +0.4x15 + 0.3x10 =364+6+3 = 12.6% Expected return B = (B) B = 0.3x6 + 0.4x75 + 03x15 =184+3+15 = 6.3% ii) Standard deviation of A 6, =/(22x0.3 + 152K0.4 + 10?x0.3) — 12.62 = (43.2 + 90 +30) — 158.76) Contact: 0707 737 890 Page 234Standard deviation of B 5p =V(6?x0.3 + 7.5?x0.4 + 5?x0.3) — 6.3? (0.8 + 225 +75) — 39.69) =v1.11 = 1.05 iii) Coefficient of correlation 50 P A (A-A) B&B (A-A)(B-B) 0.30 12 0.6 6 0.18 0.40 15 24 7S 2.88 0.30 10 26 5 3.38 6.44 COVaus _ 6.44 6,5g 2.01X15 = 2.9068 iv) Portfolio return = 0.6x12.6 + 0.4x6.3 = 7.56 + 2.52 = 10.08% Page 235FINANCIAL MANAGEMENT REVISION KIT = Y0.67x4.44 + 0.47x1.11 + 2[0.6x0.4x6.44] = V4.8672 = 2.2061 QUESTION 6 November 2017 Question 5 C ©) The expected return from the investment Month | Return Probal Expected 33—30 % d = «100% = 10% |°? a 2 100% = 0% Or 0% =30 3% : x 100% = -10% | °° ae 36 —30 % 0% 4 = 5. 100% = 20% 0.15% 3.0% 5 39 — 30 75% 3p * 100% = 10% 9.5% S QUESTION 7 November 2015 Question Five D C. Makata limited Expected return = (0.2 x 40) + (0.6 x 15)~(0.2 « 10) =8+9-2=15% Standard deviation 6= (0.2 x 40?) + (0.6 x 15%) + (0.2 x 10%)— 152 V320 + 135 +20 — 225 = 15.81% standard deviation * 100% mean 15.81 s * 100% = 105.41% Coefficient of variation = os www.someakenya.com pee