Van Schaik Bookstore has a proud heritage as one of the oldest bookstores in southern Africa and reached their 100-year milestone in 2014. It is arguably Southern Africa’s leading academic bookstore chain with more than 70 stores located in South Africa, Botswana, Swaziland and Namibia. In addition to these outlets they have several seasonal sales points, online sales through their website and a library supply service. Van Schaik Bookstore has experience in optimally servicing institutions, professionals and students by deploying the most appropriate sales channel required. Academic materials and associated products are supplied to an institution on campus or in some instances, a customized selling platform can be crafted in recognition of the diverse environments they serve. By maximizing Van Schaik Bookstore’s resources and vast experience, they are able to deliver a service to the institutions, staff and students comparable with the very best in the world. Their excellence has been recognized by the garnering of industry awards such as the prestigious Sefika Academic Bookseller of the Year Award from 2012 to 2017.
Van Schaik Bookstore Managing Director (MD) is looking to expand the interests of Van Schaik Bookstore by purchasing interest in either Allan Grey or Investec Namibia. The MD believes that the expected returns from the acquisition of either of the two asset management companies
is dependent on the state of the economy. The following information is made available:
|State of economy||Probability||ALLAN GREY||INVESTEC||MARKET|
|Book value in million||–||N$12 000 000||N$8 000 000||–|
|Market value||–||N$8 000 000||N$12 000 000||–|
|Covariance with the market||–||0.0024||0.0023||–|
The risk-free rate is 5% and there is no company or personal taxation.
1, Calculate the standard deviation of Allan Grey, Investec and the market (12)
2, If Van Schaik Bookstore could only invest in one of the two companies, which one would you advise them to select? Motivate your answer with appropriate calculations. (4)
3, Determine the expected return together with the risk of the portfolio, if Van Schaik Bookstore invests in both companies to form a portfolio. (9)