Fitrah Sdn Bhd, a manufacturer of custom golf equipment, wants to choose the better of two investments, A and B. Each requires an initial outlay of RM10,000 and each has a most likely annual rate of return of 15 percent. Management has estimated returns associated with each investment's pessimistic and optimistic outcomes. The three estimates and probability for each asset, are given in the following table:


                        Returns (%)     Probability
Asset A:
Pessimistic       13                    0.25
Most likely        15                    0.50
Optimistic         17                    0.25

Asset B:
Pessimistic        7                     0.25
Most likely         15                   0.50
Optimistic         23                   0.25


i. What is the expected return and risk for both assets?

 ii. Which of the two investments would you choose and why?


(b) i. Explain diversification.

 ii. Differentiate systematic risk from unsystematic risk and provide an example for each.

Answer rating: 100% (QA)

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