AMB Investments Ltd. is considering investing in two risky stocks: ALPHA and OMEGA. The expected return...
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AMB Investments Ltd. is considering investing in two risky stocks: ALPHA and OMEGA. The expected return for each of these securities, given three different market conditions, is given below: Market condition Bad Normal Better Probability 0.3 0.4 0.3 Return on ALPHA 8% 18% 35% Return on OMEGA 3% 25% 30% Required: a) (i) If AMB Investments Ltd decides to invest only in ALPHA, calculate the expected return and standard deviation of returns on this investment? (2.5 marks) Page 2 of 8 (ii) If AMB Investments Ltd. decides to invest only in OMEGA, what is the expected return and standard deviation of returns on this investment? (2.5 marks) b) If the correlation between the two stocks is 0.55, calculate the expected return and standard deviation of a portfolio that consists of 60% invested in ALPHA and 40% invested in OMEGA. (5 marks) c) What you would expect to happen to the expected return and standard deviation of the above portfolio if: i. There is a perfect positive correlation between ALPHA and OMEGA stocks (2 marks) ii. There is a perfect negative correlation between ALPHA and OMEGA stocks (2 marks) d) The current share price of APHA stock is £15. If it is expected to pay a dividend of £2.5 next year, has a return on equity (ROE) of 25%, and an expected dividend pay-out ratio of 30%, calculate the cost of equity for this stock. (5 marks) continue... 7002EFA e) Examine the factors that may influence a firm's decision when choosing between issuing new bonds or new equity. (6 marks) [Total 25 marks] AMB Investments Ltd. is considering investing in two risky stocks: ALPHA and OMEGA. The expected return for each of these securities, given three different market conditions, is given below: Market condition Bad Normal Better Probability 0.3 0.4 0.3 Return on ALPHA 8% 18% 35% Return on OMEGA 3% 25% 30% Required: a) (i) If AMB Investments Ltd decides to invest only in ALPHA, calculate the expected return and standard deviation of returns on this investment? (2.5 marks) Page 2 of 8 (ii) If AMB Investments Ltd. decides to invest only in OMEGA, what is the expected return and standard deviation of returns on this investment? (2.5 marks) b) If the correlation between the two stocks is 0.55, calculate the expected return and standard deviation of a portfolio that consists of 60% invested in ALPHA and 40% invested in OMEGA. (5 marks) c) What you would expect to happen to the expected return and standard deviation of the above portfolio if: i. There is a perfect positive correlation between ALPHA and OMEGA stocks (2 marks) ii. There is a perfect negative correlation between ALPHA and OMEGA stocks (2 marks) d) The current share price of APHA stock is £15. If it is expected to pay a dividend of £2.5 next year, has a return on equity (ROE) of 25%, and an expected dividend pay-out ratio of 30%, calculate the cost of equity for this stock. (5 marks) continue... 7002EFA e) Examine the factors that may influence a firm's decision when choosing between issuing new bonds or new equity. (6 marks) [Total 25 marks]
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Market Condition Bad Normal Better Market Condition Bad Normal Better PRO... View the full answer
Related Book For
Managerial Accounting
ISBN: 978-0078025518
2nd edition
Authors: Stacey Whitecotton, Robert Libby, Fred Phillips
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