You next client, is Office Pro, a producer of office furniture and you were asked to evaluate the risk and return of two assets (Asset S and Asset T) which it is considering for its asset portfolio. You checked online for the company’s financial statements and found the following historical data for the two assets for the past ten years.
Asset S (Beta 0.9) Asset T (Beta = 1.5)
Year
Dividends paid ($)
Opening Value ($)
Closing Value ($)
Dividends paid ($)
Opening Value ($)
Closing Value ($)
2007 1000 20000 22000 1500 20000 20000
2008 1500 22000 21000 1600 20000 20000
2009 1400 21000 24000 1700 20000 21000
2010 1700 24000 22000 1800 21000 21000
2011 1900 22000 23000 1900 21000 22000
2012 1600 23000 26000 2000 22000 23000
2013 1700 26000 25000 2100 23000 23000
2014 2000 25000 24000 2200 23000 24000
2015 2100 24000 27000 2300 24000 25000
2016 2200 27000 30000 2400 25000 25000
You believe that the past years are a good indicator of the future performance of the assets and the assets risks can be assessed on a standalone basis using standard deviation and coefficient of variation and as a part of Office Pro’s existing portfolio of assets using the Capital Asset Pricing Model (CAPM).
Your Manager, has asked you to prepare a report which will assist in making a decision for Office Pro. The following are some of the highlights of your report, assuming the market has a risk-free rate of 8 percent and the return on the market is 15 percent:
1. The Rate of Return for each Asset per year for 2007 to 2016.
2. Each asset’s average rate of return based on the historical annual data provided.
3. Asset S and Asset T’s standard deviation and coefficient of variation.
4. Comment on the risk and return for each asset based on your answers to 2 and 3 above. 5. The required return for each asset.
6. A recommendation on investing in which the two assets, giving reasons for your recommendation.
7. Comment on the use of standard deviation as oppose to the use of CAPM as a risk measurement.