Tutorial : Risk and return

Case Study 2 You have decided to purchase a commercial van for your company. You are looking at two brands Handa and Tayata. Both brands will provide similar benefits over 3 years. The purchasing cost of the van for each brand is RM120,000. Below are the estimated rates of return for both brands under the categories for pessimistic, most likely, and optimistic outcomes. Possible Possible Outcomes Return Outcomes Return Handa Handa (%) Tayata Tayata (%) Pessimistic 0.25 20 Pessimistic 0.2 15 Most likely 0.5 25 Most likely 0.55 25 Optimistic 0.25 30 Optimistic 0.25 35 You are required to: (a) Estimate the expected return for each brands based on the three possible outcomes. (3 marks) (b) Determine the standard deviation for both brands. (5 marks) (c) Which brand is riskier? Justify your answer. (2 marks)(d) Discuss the benefits of diversification achieved through the creation of the portfolio. (10 marks)