Required: a. Calculate the standard deviation of returns of each service provider. b. Which service provider would you recommend for Mr. Lutombi to invest in? c. Assuming Mr. Lutombi invests 40% of his money in MTC and the rest in Telecom, what is Mr. Lutombi portfolio return?
Required: a. Calculate the standard deviation of returns of each service provider. b. Which service provider would you recommend for Mr. Lutombi to invest in? c. Assuming Mr. Lutombi invests 40% of his money in MTC and the rest in Telecom, what is Mr. Lutombi portfolio return?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
100%
Required:
a. Calculate the standard deviation of returns of each service provider.
b. Which service provider would you recommend for Mr. Lutombi to invest in?
c. Assuming Mr. Lutombi invests 40% of his money in MTC and the rest in Telecom, what is Mr. Lutombi portfolio return?
Transcribed Image Text:Question 3
Mr. Lutombi, aged 55 years old, is the current Roads Authority (RA) CEO. He is
contemplating an early retirement and plans to invest his terminal benefits in Mobile
Telecommunication Company (MTC) Namibia (MTC) and separate TELECOM Namibia
(TELECOM) STOCK. Telecom is 100% government owned and was established in 1992
as a commercial subsidiary company of Namibia Post and Telecom Holdings Limited.
TELECOM is serving more than 396 000 (fixed and mobile) customers, with 986
employees and annual revenue of more than N$ 1.5 Billion. MTC was established in 1994
and is mainly into mobile cellular business with over two million active subscribers and
has a staff compliment of 421.
The following information relates to the two companies:
State of the economy
MTC
Probability of state
of economy
Likely returns given
state of economy
Boom
50
10%
Depression
20
12%
Recession
?
2%
Assuming: The market return is 12%, standard deviation of expected market return is
6%.
Telecom
Likely returns given state
of economy
22%
(2%)
15%
Expert Solution
Step 1
In finance we use standard deviation as a measure of risk.
Now standard deviation of returns is a measure of volatility. The higher is the volatility the higher is the risk.
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