Question 1 Firefly Inc. and Dragon Fly Stock Inc. are comparing the performance of their share. Firefly has average of 1

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Question 1 Firefly Inc And Dragon Fly Stock Inc Are Comparing The Performance Of Their Share Firefly Has Average Of 1 1 (1.1 MiB) Viewed 18 times

Question 1 Firefly Inc. and Dragon Fly Stock Inc. are comparing the performance of their share. Firefly has average of 19 percent rate of return and Dragon Fly has 16 percent rate of return. However, the beta of the fund by Firefly is 1.5, whereas Dragon Fly is 1. (a) Discuss which fund is a better selection as an individual fund. (4 marks) (b) Calculate the abnormal return for both shares if the risk-free rate is 6 percent and the return on market is 14 percent. Explain which share is a better selection for an investor. (7 marks) (c) Investor is considering to invest in new share currently selling at $40. The share is expected to pay dividend $3 next years. The investor predicted the price of share to increase to $41 next year. The share currently having beta of 0.5. Determine whether the share in underpriced or overpriced, if the risk free is 3 percent and return on market is 15 percent. Explain which share is better to select by an investor to add into his portfolio (9 marks)