(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)
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%
Get Answers For Free
Most questions answered within 1 hours.