INV2601 Assessment 1 Semester 2023 Detailed Solutions

INV2601: INVESTMENTS AN INTRODUCTION

ASSIGNMENT 01 SOLUTIONS

SEMESTER 1 2023




QUESTION 1
Which of the following pairs refer to the same type of risk?

a. Total risk and the variance of returns
b. Systematic risk and firm-specific risk
c. Systematic risk and unsystematic risk
d. Undiversifiable risk and unsystematic risk
• The standard deviation is a measure of total risk. It measures how tightly the probability
distribution is centred around (variance) the expected value.
• Systematic risk refers to markets risk which is undiversifiable

• Unsystematic risk refers to firm specific risk which is diversifiable.

, QUESTION 2

An analyst gathered the following information about Natal Limited and the market.
Current market price per share R35.46
Most recent earning per share paid R1.60
Most recent dividend per share paid R0.40
Return-on-assets ratio 20%
Financial leverage 1.50
Beta for Natal Limited 0.52
Expected rate of return on the market portfolio 9%
Risk-free rate of return 3%


What is the required rate of return of Natal Limited if you use the Capital Asset Pricing
Model (CAPM)?
a. 6.12%
b. 7.68%
c. 9.00%
d. 12.00%

Required return = Rf +β (Rm – Rf)

= 3 + 0.52(9-3) = 6.12%




QUESTION 3

An analyst gathered the following information about Natal Limited and the market.
Current market price per share R35.46
Most recent earning per share paid R1.60
Most recent dividend per share paid R0.40
Return-on-assets ratio 20%
Financial leverage 1.50
Beta for Natal Limited 0.52
Expected rate of return on the market portfolio 9%
Risk-free rate of return 3%