1.

RISK AND RETURN ANALYSIS

2. PORTFOLIO THEORY

Q 01. A Tanzanian portfolio manager is contemplating to build up an portfolio which is 60% invested
in the Swala shares and 40% invested in Simba shares.

States Pi Swala(%) Simba(%)

i 0.5 10 10
ii 0.3 10 10
ii 0.2 20 30
Required: Calculate Expected Return and risk of each the investment, covariance and correlation and risk
of portfolio.

Q2.
Given the following information from return of security X and DSE
State Probabilities Returns of DSE Returns of stock X
1 50% 10% 12%
2 30% 10% 8%
3 20% 30% 16%

Required, Calculate Beta of stock X

Q3. NBAA MAY 2005

You are analyst and Mr. Saad has approached you to assist in appraising the three projects
Project Arusha Bukoba Tanga

Expected return 15% 13% 17%

Estimated correlation coefficient with market 0.75 -0.9 0.58

Standard deviation of returns 4% 5% 7%

The expected market return is 16%, the standard deviation of market returns is 5%, treasury bill
rate is 9%. Evaluate the economic variability of the project

Q4.
Jangala and Joseph are two famous security analysts at the local stock market. Recently the local
stock exchange has experienced market changes due to different economic and political factors
which have affected the price and return of the security traded in the market. As a result of the
market changes, the two analysts have selected different stocks with each claiming that the stock
selected is highly performing than the other. The expected return on the two stocks for two
particular market returns are provided in the table below:
 Jangala Selected Stock Joseph Selected Stock
Return 19% 16%
Beta 1.5 1.0

Required:
(i) Can you tell which investor had a better performing stock aside from the issue of general
movements in the market? Explain. (4 marks)
(ii) If the government bond rate were 6% and the market return during the period were 14% which
investor would have a superior stock selection? (5 marks)
Q5.A study by a Mutual fund has revealed the following data in respect of three securities:
Security σ (%) Correlation with Index, Pm
A 20 0.60
B 18 0.95
C 12 0.75
The standard deviation of market portfolio (BSE Sensex) is observed to be 15%.
i. What is the sensitivity of returns of each stock with respect to the market?
ii. What would be the risk of portfolio consisting of all the three stocks equally?
iii. What is the beta of the portfolio consisting of equal investment in each stock?
iv. What is the total, systematic and unsystematic risk of the portfolio in (iv)

Q6. Given,
State of economy Probability Security A ‘return (%) Security B ‘return (%)
Boom 0.5 20 24
Recession 0.3 20 16
Decline 0.2 0 -4
a) Calculate Expected Return and risk of each the investment, covariance and correlation
If investor decided to invest 10m in security A and 10m in security B Calculate Expected Return
and risk of the portfolio

Q7 You are given the following data from five mutual fund
Fund Return Standard deviation Beta
A 15 7 1.25
B 18 10 0.75
C 14 5 1.4
D 12 6 0.98
E 16 9 1.5
Required: Rank these portfolio using Treynor’s method and Sharpe method assuming risk free
rate is 6%

Q8. NBAA NOV 2012

A Tanzanian portfolio manager is contemplating to build up an international portfolio which is
60% invested in the Dar essalaam stock exchange (DSE) and 40% invested in either of two foreign
markets: Nairobi stock exchange (NSE) and New york stock exchange (NYSE). The manager has
gathered the following information on there different stock exchanges.
Expected Return Standard Correlation with DSE
Deviation
DSE 10% 9% 1.0

NSE 15% 8% 0.7

NYSE 20% 10% 0.0

Required
(i) Determine the risks of the above-mentioned internationally diversified portfolio and
calculate the beta of each of the two foreign markets relative to the DSE.
(ii) Which of the foreign market is as risky as the DSE?
(iii) Which of the two portfolios is likely to be chosen by the manager? Why?
(10 marks)
Q09.NBAA B1 MAY 2015
Tangwi plc is considering investing in one of the two proposed short-term portfolio of four
shot-term financial investments. The correlation between the returns of the individual
investments is believed to be negligible in both options proposed. The market return is
estimated to be 15% and the risk free rate 5%.
Portfolio 1
Investments Amounts Expected Total Risk Beta
Invested return
Tshs.(million)
a 10 20% 8 0.7
b 40 22% 10 1.2
c 30 24% 11 1.3
d 20 26% 9 1.4

Portfolio 2
Investments Amounts Expected Total Risk Beta
Invested return
TZS.(Million)
 a 20 18% 7 0.8
b 40 20% 9 1.1
c 20 22% 12 1.2
d 20 16% 13 1.4

Required:
(i) Calculate the risk and return of the two portfolios using the principles of both portfolio
theory and the CAPM.
(ii) Which portfolio appears to be more efficient?
(8 marks)
(Total: 20 marks)
Q10.NBAA B1 NOV 2015
Investments Outlay now Expected receipt in one year Beta
Tshs .(million)
A 70 76.65 0.3
B 70 79.10 0.5
C 105 124.6 1.0
D 140 168.0 2.0

The Treasury bill rate is 8% and the expected return on average market of portfolio is 15%
Required:
i. Calculate Kimolo’s beta factor
ii. Evaluate the economic viability of each project

Q 11.
Expected returns on two stocks for particular market returns are given in the following table:
Market Return Aggressive Defensive
7% 4% 9%
25% 40% 1 8%
You are required to calculate:
a) The Betas of the two stocks.
b) Expected return of each stock, if the market return is equally likely to be 7% or 25%.

Q10
Kimolo Company is an all equity financed company with a cost of capital of 19%. It is considering
the following capital investment projects
:
Project Outlay now (TZS) Expected receipt in one year (TZS) Beta factor

A 70 million 76.65 million 0.3

B 70 million 79.10 million 0.5

 C 105 million 124.6 million 1.0

D 140 million 168.0 million 2.0

The Treasury bill rate is 8% and the expected return on an average market portfolio is 15%.
Required:
(i) Calculate Kimolo’s beta factor
(ii) Evaluate the economic viability of the projects.

Q11
You have been hired as a Financial Analyst by Hesley Company. The company considering
investing in one of two projects and the Managing Director of the firm has approached you for an
immediate advice. Returns on the two projects are very much influenced by the weather.

The details of the two projects as well as the estimated returns of the market are as given below:
State of Nature Probability Project I Project II Market
Arusha Mining
Mwanza Poultry

Possible Return Possible Return Estimated Return

Rainy 0.4 10% 15% 30%

Sunny 0.4 20% 20% 20%

Cloudy 0.2 10% -5% -10%

Either, project would require an investment of Tshs. 175 million. The company has currently in
issue of one million. Tshs. 100 ordinary shares with market value of Tshs. 120 ex-div each and
10% unsecured bonds currently quoted at 105.8 percent.
The Tanzania Treasury bill rate is currently 9%.

Required:
By making necessary computation and analysis, advise the Managing Director whether the
company should invest in Project I (Mwanza Poultry) or Project II (Arusha Mining) or neither.

Q12
You are a financial consultant working with a Tanzanian based firm. The firm’s Managing Director
has approached you to assist in an urgent investment decision. It has currently no business in these
countries. The firm considers establishing an equally invested two investment portfolio comprising
investments in any two of the securities. A preliminary appraisal of investment in each security
was carried out, the results of which are detailed in the table below.
 Arusha Dodoma Tanga

Expected Return 20% 10% 30%

Standard Deviation 8% 6% 15%

The coefficients of correlation between investments are estimated to be:

UK – Arusha -0.4
UK – Dodoma -0.7
USA – Tanga 0.9

Required:
(i) Compute the risk and return of the alternative investment portfolios
(ii) Advise the firm on the appropriate investment portfolio based on portfolio relative risk.

Q13
Masatu is a business man whose businesses are located in Dar es Salaam city centre. For a long
period, Masatu has been hearing about capital market and has even attended some of the seminars
on investing in capital market. Despite the vast information that Masatu has on operations of
capital market, he has not yet invested in any of the products traded in the local stock exchange
and the reason being lack of enough knowledge on choosing the profitable investments in the
market. Recently, on of Masatu’s friend who is a financial analyst advised Masatu to consider two
shares which are traded in the local stock exchange that are considered to be more profitable. The
following information on the shares were obtained:
Alpha Shares Beta Shares

Annual Investment Probability of Annual Investment Probability of

Return Occurrence Return Occurrence

12% 0.4 10% 0.3

24% 0.5 20% 0.6

18% 0.1 17% 0.1

The financial analyst has indicated that Masatu should invest in both investments in order to
optimize return and risk. The analyst calculated the co-efficient of correlation between the two
shares which is +0.75 and has convinced Masatu to invest TZS. 1,200,000 in Alpha shares and
TZS. 800,000 in Beta shares. The analyst has established that the return on government bond is
4% while the market has a return of 10% and risk of 6%.

Required:
(i) Estimated the expected return of each share and that of the proposed portfolio.
(ii) Estimate the beta of the portfolio (βp) assuming that it is efficient according to the
CapitalAsset Pricing Model (CAPM).
(iii) Comment on the portfolio beta (βp) relative to the market portfolio (βm).

Q14

You are analyst has approached you to assist in Calculation of expected rate of return on individual
security

Investment Cost ($) Dividends ($`) Capital Gains Beta

($`)
Shares A 16,000 1,600 400 0.7
Shares B 20,000 1,600 1,000 0.9
Shares C 32,000 1,600 12,000 1.1
PSU Bonds 68,000 6,800 -3,400 1.3
1,36,000 11,600 10,000
Q15
A division of Bawaba Company has been allocated a fixed capital sum by the main Board of
Directors for its capital investment during the next year. The division’s management has identified
three capital investment projects, each potentially successful and of similar size. However, it has
only been allocated enough funds to undertake two projects. Projects are not divisible and cannot
be postponed until a later date.
The division’s management proposed to use portfolio theory to determine which two projects
should be undertaken, based on an analysis of the projects’ risk and return. The success of the
projects will depend on the growth rate of the economy. Estimate of project returns at different
levels of economic growth are as follows:

Economic Probability Estimate Estimate Estimate

Growth of Return Return Return
(Annual Occurrence (%) (%) (%)
Average)
Project Project 2 Project
1 3
Zero 0.2 5 5 10
2 percent 0.3 10 10 10
4 percent 0.3 10 10 10
6 percent 0.2 5 20 10
The company is contemplating on whether to invest in Portfolio 1 or Portfolio 2. Portfolio 1 is
made up of Projects 1 and 2 while Portfolio 2 is made up of Projects 1 and 3. The projects in each
portfolio are equally weighted.
REQUIRED:
Use the above information to evaluate which of the two portfolios the division of Bawaba
Company is likely to undertake. All relevant information must be shown.

Question 16 NBAA Feb 2023

An investor has a portfolio of shares in four (4) listed companies as detailed below:

Company Number of Market Price Beta Factor Expected

Shares Held per Share Return
during the
Next Year
Ace Ltd 5,000 TZS.500 1.5 19.5%
Black Ltd 7,000 TZS.600 2.0 22%
Club Ltd 8,000 TZS.700 1.7 20%
Diamond Ltd 9,000 TZS.800 0.7 13%
At present, the risk-free rate of return is 7% while the return on market is 15%.

REQUIRED:
(i) Calculate the beta for the portfolio and the required return on the portfolio. (4 marks)
(ii) Assess the performance of the individual share in the portfolio and state whether the portfolio
investment is financially viable. (4 marks)