Analyzing Investment Returns and Risks in Business Finance

This assignment provides a comprehensive overview of key financial concepts, focusing on investment returns, risk management, and portfolio analysis. It includes calculations for holding period returns, expected returns, and the application of the Capital Asset Pricing Model (CAPM) to determine required returns. The assignment examines diversification strategies to mitigate risks and differentiates between diversifiable and non-diversifiable risks. Additionally, it explores the impact of payment timing on interest earned, highlighting the advantages of early payments. The assignment is designed to enhance understanding of financial principles and their practical applications in business contexts.

BUSINESS FINANCE
Student ID:
[Pick the date]

TASK 1
The year payment would be lower when the payment is made at the beginning of the year
rather than the end. This is because the interest earned would be higher in this case since the
accruing of interest would begin from an earlier date. Consider for instance Year 1 of
payment. With regards to beginning of year payment, the payment would be made on January
1 unlike the end of year payment which would be derived on December 31. Clearly, in the
option of money depositing at the beginning of the year, interest is earned for a longer
duration and hence the amount deposited would be lower.
RANDOM QUESTIONS
Question 2
Answer is 15% (option D)
Holding period return = [(3.45-3)/3]*100 = 15%
Question 8
Answer is 17.6% (Option C)
Expected return on portfolio = 0.2*36 + 0.4*20 + 0.4*6 = 17.6%
Question 9
Answer is Option A
II and III highlight risks related to Ford company which can be minimised through
diversification. I and IV indicate non-diversifiable or systematic risks.
Question 17
Answer is 8.2% (option D)
Expected return = 0.1*-30 + 0.2*-2 + 0.4*10 + 0.2*18 + 0.1*40 = 8.2%
Question 19
Answer is 3.82% (option C)
As per the CAPM,

Required Return = Risk free Rate + Beta*(Market Returns – Risk free rate)
30 = Risk free Rate + 3.2 (12 - Risk free rate)
Solving the above, Risk free rate = 3.82%