You are considering Perfect Drycleaning Inc (PDI) and Banff Ski Resorts (BSR) as potential investments and neither one pays dividends. Currently, PDI shares are selling at $50 per share while the shares of BSR are selling at $55 per share. Your analysis assures you that in a year from today PDI shares are expected to reach $56.45 while the shares of BSR are expected to rise to $63. You estimate the betas to be respectively 1.2 for PDI and 1.28 for BSR. In addition, you learn that the consensus of financial analysts suggests that over the next year, the risk-free rate is expected to be 6.5% while the expected return on the TSX index is 11%.

a) What is the required rate of return on each of PDI and BSR? (4 marks)

b) If you want to invest in PDI or in BSR but not both, which one would you choose and why? (5 marks)

c) You decided to purchase 400 shares of PDI and 300 shares of BSR. What will be the beta of your portfolio? (4 marks)

Answer rating: 100% (QA)

a To calculate the required rate of return for each investment we will use the Capital Asset Pricing ... View the full answer