Reference no: EM133171483
Question - Stephanie is searching for shares to include in her current share portfolio. She is interested in Kamosa Ltd shares Stephanie has been impressed with Kamosa Ltd.'s computer products and believes it is an innovative market player. However, Stephanie also realises that any time you consider a so-called Kamosa share, risk is a major concern. The rule she follows is to include only securities with a coefficient of variation of returns below 0.75.
Stephanie has obtained the following price information for the period from 2017 to 2021. Kamosa Ltd, being growth-oriented, did not pay any dividends during these four years.
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Kamosa Ltd Share Price
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YEAR
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Beginning
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End
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2017 - 2018
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$17.36
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$21.55
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2018 - 2019
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21.55
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34.78
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2019 - 2020
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34.78
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58.38
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2020 - 2021
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58.38
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81.80
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Required -
1. Calculate the rate of return each year, from 2017 to 2021, for Kamosa Ltd.
2. Calculate the average return over 2017-2021 period. Assume that each year's return is equally probable.
3. Calculate the standard deviation of returns over the past four years and interpret the result.
4. Based on parts b and c, determine the coefficient of variation of returns for the security and interpret the result.
5. Assume that Kamosa Ltd has a β of 1.5. If financial analysts expect the market return to decrease by 9% due to negative impact of the COVID-19 pandemic in the 2020-2021 financial year, what would be Kamosa Ltd.'s expected return? Considering this new information what should be Stephanie's decision regarding the inclusion of Kamosa Ltd shares in her portfolio.