EVALUATION OF BUSINESS INVESTMENTS Question One: Dan Tajiri an investment specialist has been entrusted with sh.10, 000,

[answerhappygod]

EVALUATION OF BUSINESS INVESTMENTS
Question One:
Dan Tajiri an investment specialist has been entrusted with
sh.10, 000,000 by a unit trust and instructed to invest the money
optimally over a 2 year period. Part of the instructions are:
The following are details of the
investment in the projects and the money market.
Initial
ExpectedReturn
over

standard deviation
Cost
the two years

return over the two years
(Shs.’000’)

%

%
Project
1(p1)

6,000

22
7
Project
2(p2)

4,000

26
9
Project
3(p3)

6,000

28
15
Project
4(p4)

6,000

34
13
Money market (MM)
1,000(minimum)
18
5
The correlation coefficients of returns over the 2 years are as
follows:
Between

Between
projects
Between
projects

between money market
Projects
and market
portfolio (MP) and the money market
(MM) and market
portfolio
P1 and p2 =
0.7
p1 and MP =
0.68
p1 and MM =
0.4
MM and MP = 0.4
P1 and p3 =
0.62
p2 and MP =
0.65
p2 and MM =
0.45
P1 and p4 =
0.56
p3 and MP =
0.75
p3 and MM = 0.55
P2 and p4 =
0.57
p4 and MP =
0.88
p4 and MM = 0.6
P3 and p4 = 0.76
Over the two-year period the risk free rate is estimated to be
12 %, market portfolio return is 25% and the variance of returns on
the market is 289 %
Required: On basis of two
asset portfolios:
i)Use portfolio theory to determine how DanTajiri should invest
the shs10 million (15
Marks)
ii)Using the capital asset pricing model advise how Dan Tajiri
should invest the sh.15 Million
(
30 Marks)