Question

(i) The risk-free rate of return is 6% and the return on the market portfolio is 9.5%. What is the expected return from shares in companies in Zambia and South Africa if: (1) The beta factor for company Zambia shares is 3.25. [2 Marks] (2) The beta factor for company South Africa shares is 0.90. [2 Marks] (ii) The return on shares of company Zambia is 12%, but its normal beta factor is 1.12. The risk-free rate of return is 6 % and the market rate of return is 9%. Calculate the abnormal return (alpha factor). [6 Marks]

Answer 1

Answer:
(1)

Rfr = 6%

Return on market = 9.5%

Zambia beta = 3.25 and South Africa beta = 0.90

Expected return from shares in companies in Zambia = Rfr + B(Return on market - Rfr)

= 6% + 3.25(9.5% - 6%)

= 17.375%

Expected return from shares in companies in South Africa = Rfr + B(Return on market - Rfr)

= 6% + 0.90(9.5% - 6%)

= 9.15%

(2)

Actual Return on shares of company Zambia = 12%

Beta = 1.12, Rfr = 6% and Market return = 9%

Expected return = Rfr + B(Return on market - Rfr)

= 6% + 1.12(9%-6%)

= 9.36%

Abnormal return = Actual return - Expected return

= 12% - 9.36%

= 2.64%