Expected rate of return and standard deviation
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You have some money to invest for 12 months and are considering purchasing shares in the retail sector. After reviewing the historical performance and future prospects for Elite Jewellery Ltd. and So Lo Supermarkets Ltd, you have prepared the following information that you willuse for your investment decision:
Elite Jewellery Ltd: So Lo Supermarkets Ltd
Current share price $9.00 $11.60
Current EPS $1.20 0.90
Current Beta 0.85 0.60
Elite Jewellery Ltd So Lo Supermarkets Ltd
Probability of Likely return over Probability of Likely return over return next 12 months return nxt 12 months
0.15 -1% 0.10 1%
0.60 12% 0.40 7%
0.25 18% 0.30 10%
0.20 14%
Other relevant information:
Current risk free rate of return: 5% p.a.
Long run average return on market protfolio: 12% p.a.
Required:
1) Calculate the expected return and standard deviation for each company shares.
2) Briefly explain the meaning of expected return and standard deviation and outline what your calculations indicate about a relationship between risk and return?
3) Briefly outline in words that an average person in the street can understand the difference between standard and beta as measures of risk?
4) Calculate the return investors with a diversified portfolio should require from each share?
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