A private equity firm requested your help in deciding between two investments in the Medical Services

Sector (Investment A and B). The following points should be noted before making a decision on those

two investments.

Investment A is currently trading at R1.25 per share and the following is estimated for the investment.

Event	Probability of event	Share price 1 year from now	Dividend paid over next year
A. Big drop in sugar consumption	20%	R0.90	10c
B. Minor drop in sugar consumption	40%	R1.35	20c
C. No change in sugar consumption	40%	R1.80	40c

Investment B has shown in the past that its returns are much more volatile than that of the market.

This volatility is evident from a Beta of 1.4. The returns that can be achieved in this market is currently

estimated at 18% and risk-free investments are attracting 8%.

2.1 Calculate the rate of return for each of the events (A, B, C) that is associated with investment A.

2.2 Calculate the expected rate of return for investment A.

2.3 Using the CAPM, calculate the required return from Investment B that will warrant an investment.

2.4 Differentiate between market risk and specific risk.