Question 2

Your firm recently divested some non-core assets and now has a significant amount of excess cash. Barry Allen, the CEO, is considering investing in either Sizzle

Technologies Engineering Limited ("STE") shares or 10-year Super Government Securities ("SGS") or a combination of both. He knows that you are studying a

Finance course, and he is seeking your advice.

Based on your research, the following market data was obtained:

Information relating to STE,

DateShare Price Dividends per Share (cents)

31-Dec-133.5915

31-Dec-143.2515

31-Dec-152.8315

31-Dec-163.3015

31-Dec-173.3715

31-Dec-183.7215

As at December 2018, beta is 0.72.

Information

relating to SGS,

DateBond Price

31-Dec-13101.61

31-Dec-14106.21

31-Dec-1598.15

31-Dec-1697.08

31-Dec-17112.47

31-Dec-18104.94

The coupon rate is 2.75% per year and will mature in December 2023.

Other market data

Market risk premium = 5.5%

Inflation rate = 1.2%

Expected Return = 5.16%

Historical Arithmetic Average Returns over the last 5 Years: STE = 1.34%, SGS = 1%

Historical Geometric Average Returns over the last 5 Years: STE = 0.71%, SGS = 0.65%

(a) Discuss two (2) reasons why the expected return is different from the historical arithmetic average return.

(b) Calculate the historical variance and standard deviation of returns for both STE and SGS.

(c) Discuss the differences between systematic risk and total risk, and ascertain which measure of is more appropriate for the firm to use.