You just graduated with MBA in Accounting and Finance from the University of Professional Studies and are employed by JEK Investments Ltd, a brokerage firm in Ghana. Kweku The Don, an illiterate businessman, visited your firm for a piece of investment advice and possibly make some investments. Although an accomplished businessman, he was advised by his son to buy some shares on the Ghana Stock Exchange in other to diversify his portfolio. Your boss has asked you to consider either Cronox Industries or Zealous Incorporated The share prices and dividends for the two companies and the returns on the Ghana Stock Exchange are shown below for the period 2016-2021. Year 2016 2017 2018 2019 2020 2021 Cronox Industries Stock price Dividend (GHC) 7.62 12 10.75 17 15.75 17.25 0.90 0.95 1.00 1.06 1.15 Zealous Incorporated Stock price Dividend (GH₂) 55.75 60.00 57.25 48.75 52.30 48.75 2.25 2.50 2.75 2.90 3.00 GSE Returns Market Returns) 0.07 0.12 0.08 0.23 0.18 a. Compare the two companies regarding risk and returns and advise Kweku The Don on which one to invest in. b. Calculate the covariance and the correlation coefficient between the two stocks c. Assuming Kweku the Don wants to invest the same amount in each of the stocks, what will be his portfolio risk and portfolio return
You just graduated with MBA in Accounting and Finance from the University of Professional Studies and are employed by JEK Investments Ltd, a brokerage firm in Ghana. Kweku The Don, an illiterate businessman, visited your firm for a piece of investment advice and possibly make some investments. Although an accomplished businessman, he was advised by his son to buy some shares on the Ghana Stock Exchange in other to diversify his portfolio. Your boss has asked you to consider either Cronox Industries or Zealous Incorporated The share prices and dividends for the two companies and the returns on the Ghana Stock Exchange are shown below for the period 2016-2021. Year 2016 2017 2018 2019 2020 2021 Cronox Industries Stock price Dividend (GHC) 7.62 12 10.75 17 15.75 17.25 0.90 0.95 1.00 1.06 1.15 Zealous Incorporated Stock price Dividend (GH₂) 55.75 60.00 57.25 48.75 52.30 48.75 2.25 2.50 2.75 2.90 3.00 GSE Returns Market Returns) 0.07 0.12 0.08 0.23 0.18 a. Compare the two companies regarding risk and returns and advise Kweku The Don on which one to invest in. b. Calculate the covariance and the correlation coefficient between the two stocks c. Assuming Kweku the Don wants to invest the same amount in each of the stocks, what will be his portfolio risk and 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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Transcribed Image Text:Question 3
You just graduated with MBA in Accounting and Finance from the University of Professional Studies and are
employed by JEK Investments Ltd, a brokerage firm in Ghana. Kweku The Don, an illiterate businessman, visited
your firm for a piece of investment advice and possibly make some investments. Although an accomplished
businessman, he was advised by his son to buy some shares on the Ghana Stock Exchange in other to diversify
his portfolio. Your boss has asked you to consider either Cronox Industries or Zealous Incorporated The share
prices and dividends for the two companies and the returns on the Ghana Stock Exchange are shown below for
the period 2016 - 2021.
Zealous Incorporated
Stock price Dividend Stock price Dividend
(GHe)
Cronox Industries
Year
GSE Returns
(GHe)
Market
Returns )
2016
7.62
55.75
2017
2018
2019
12
0.90
60.00
2.25
0.07
10.75
17
0.95
57.25
48.75
2.50
0.12
1.00
2.75
0.08
2020
15.75
1.06
52.30
2.90
0.23
2021
17.25
1.15
48.75
3.00
0.18
a. Compare the two companies regarding risk and returns and advise Kweku The Don on which one to invest
in.
b. Calculate the covariance and the correlation coefficient between the two stocks
c. Assuming Kweku the Don wants to invest the same amount in each of the stocks, what will be his portfolio
risk and portfolio return
d. Compute the beta for both Cronox and Zealous
e. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is
"riskier"? Explain.
£ Based on your knowledge of the market beta, do you think Kweku The Don will be adequately
compensated for the level of risk he is willing to assume?
g. Assuming the risk-free rate is 5%, what is the expected rate of return using the CAPM?
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