Question-1: Risk and return You are considering purchasing some shares in the retail sector over the next 12 months and are investigating Grapes Ltd. and Watermelon Ltd. as suitable companies to add to your fully diversified portfolio of investments. After reviewing the historical performance and future prospects for both companies, you have prepared the following information that you will use to make your investment selection: Current Share Price Current EPS Current beta Grapes Ltd. $1.70 $0.3 0.85 Watermelon Ltd. $2.45 $0.16 0.49 Grapes Ltcd Watermelon Ltd Probability of Return Likely return over next Probability of Return 0.25 0.25 0.5 Likely return over next 12 months 0.02 0.10 0.08 0.25 0.1 0.3 0.35 12 months 0.05 0.16 0.18 0.16 The current risk free rate of return is 5% pa. and the current return on market portfolio is 13% pa. (a) Calculate the expected return for each share that reflects your predictions for the next 12 months. (b) Calculate the required return for each share, given its risk characteristics. (c) Which of the above shares (if any) would you buy based on your calculations, in (a) and (b) above? Explain your reasons. (d) Given your answers in (a) - (c) above briefly explain what should happen if the share market is efficient. (e) Briefly explain what is likely to occur, in relation to the risk exposure of an investment portfolio, as an investor increases the number of investments in the investment portfolio