Question

rate of return for the shares was 15%. Josephine wants to sell these shares to pay for her university studies. The current required rate of return for the shares is 11%. Required: 3.1. Calculate the current value of a Black Stuff ordinary share. (4) 3.2. Calculate the total capital gain or loss on the shares if Josephine sells them now. (8) Show all calculations and round off final answers to the closest rand. Question 4 [25] A group of five friends decided to each contribute R2 000 to an investment pool and then to invest the total amount in the pool in one of two shares recommended to them by an investment analyst. The group members consider themselves to be rational investors. The recommended shares are shares in Industrial Engineering Ltd and Skytech Aviation (Pty) Ltd. Page 6 of Assignment SBS Southern Business School

Question 4
Please assist with question 4

Answer 1

4.1) Calculation of Expected return of Industrial Engineering's shares:

Particulars	probability (1)	Return (2)	Expected return (3) (1*2)
Pessimistic	0.32	9%	2.88%
Fair	0.45	12%	5.4%
Optimistic	0.23	16%	3.68%
		Expected return	11.96%

Calculation of risk:

Particulars	Probability (1)	Return-Expected return (2)	Square of Return-Expected return (3)	Variance (4) (1*3)
Pessimistic	0.32	9%-11.96%=-2.96% or -0.0296	(-0.0296)^2 =0.00087	0.0002784
Fair	0.45	12%-11.96%=0.04% or 0.0004	(0.0004)^2 =0.0000002	0.00000009
Optimistic	0.23	16%-11.96%=4.04% or 0.0404	(0.0404)^2 =0.001632	0.00037
			Variance	0.00065

Risk = Square root of Variance

= Square root of 0.00065

= 0.0255 or 2.55%

4.2)

Particulars	Industrial Engineering	Skytech
Expected return	11.96%	15%
Risk	2.55%	6%

Based on the above calculations, the expected return of Skytech is higher than industrial Engineering and also with minimum risk of 6% Skytech is producing returns of 15%. Hence it is advisable to invest in Skytech.

Note : Final answers are rounded to two decimals