Question 01

Given below is hypothetical data on two stocks on the Lusaka Stock Excahnge and the market data (All Lusaka Share Index). The market data already includes dividends paid during the year.

Stock 1 Stock 2Market Index

Year Stock Price(K) Dividend(K) Stock PriceDividend(K) (Includes Dividends)

2013: 25.88 1.73 73.13 4.5017,495.97

2012: 22.13 1.59 78.454.3513,178.55

2011: 24.75 1.50 73.134.1313,019.97

2010: 16.13 1.43 85.883.759,651.05

2009: 17.06 1.35 90.003.388,403.42

2008: 11.44 1.28 83.633.007,058.96

Required:

Use Excel for the following questions :

i.come up with a table presenting the Returns on the three securities for each year (Years, as Rows; Security Names as Columns).

ii.Determine and explain the following for each security by referring to part (i) above:

• The appropriate Annual Average Return
• The Total risk exposure
• The Downside deviation (Semi deviation)
• The relationship between Stock 1 and the market, as well as Stock 2 and the market.

[30 Marks]

Question 02

You are considering purchasing a stock. In a growing economy, the potential return is 20percent, but if the economy stagnates, the potential return is only 7percent. In the case of a recession, you could sustain a loss since the anticipated return is

-8percent. The probability of economic growth is 60percent, while the probability of stagnation and recession are 30percent and 10percent respectively.

Assume the risk-free rate and the Security's risk premium were 7 percent and 8 percent, respectively.

Required:

i.What is your return expectation on this investment?

ii.What is the total expected volatility in the investment returns?

iii.Calculate the minimum rate of return you would require from the investment.

iv.Explain whether you should proceed and buy the stock.

[20 Marks]