Tigers Limited has had a very successful year, and has generated a cash surplus of £1m which will be used for expansion in one year’s time. The management team of Tigers is considering investing the cash surplus in UK equities until the funds are needed. A shortlist of eight equities has been selected, and details of these are given below.
Equity beta
Peppitt Petroleum 0.95
FlyMe Airways 1.42
D4 Telecom 0.73
Sleepy Hotels 1.68
TrustUs Bank 0.94
Safer Insurance 1.05
Tasty Foods 0.90
Sparket Electric Company 0.80
The managing director is unsure whether to invest equal amounts in the four lowest beta companies or in all eight companies.
(a) Discuss which of the options mentioned above may be more appropriate for Tigers Ltd. Within your discussion you should consider the risk of each option, and also whether any alternatives to equity should be considered.
(b) It has been argued that the use of CAPM in practice can lead to incorrect results. Critically assess the validity of this argument, paying particular attention to the key weaknesses of the CAPM.
(c) Discuss the differences between active and passive portfolio management.