Question

Q3.7 Given the following information, which investment would you choose? Justify your choice.

	INVESTMENT BETA	INVESTMENT GAMMA
Expected Return	9%	5%
Risk	13.5%	7.5%

Q3.8Suppose a share had an initial price of $83 per share, paid a dividend of $1.40 per share during the year, and had an ending price of $91 per share. Calculate the percentage total return.

Q3.9Redo Q3.8 assuming the ending price is $76.

Answer 1

3.7). C.V. = [S.D. / Mean] x 100%

C.V. (Beta) = [13.5% / 9%] x 100% = 150%

C.V. (Gamma) = [7.5% / 5%] x 100% = 150%

Investor would be indifferent between the two investment, as the CV of both the investments is same.

3.8). Percentage Total Return = (Dividend + Capital Gain) / Initial Investment

= [$1.40 + ($91 - $83)] / $83 = $9.40 / $83 = 11.33%

3.9). Percentage Total Return = (Dividend + Capital Gain) / Initial Investment

= [$1.40 + ($76 - $83)] / $83 = -$5.60 / $83 = -6.75%