a. Portfolio Beta Calculation

The beta of Bettaluck’s portfolio can be calculated as the weighted average of each company’s beta, weighted by the market value of the shares.

1. Portfolio Beta = Total Weighted Beta / Total Market Value of Portfolio
   = ₦1,381,598 / ₦1,100,500 = 1.26

Since the portfolio beta is more than 1, Bettaluck’s portfolio is riskier than the market (beta of 1).

b) The composition of the short-term investment portfolio may be considered from two viewpoints:
i. Is the expected performance of the individual investments within the
portfolio satisfactory?
ii. Does the portfolio provide the most suitable form of short-term
investments for the company?
The individual shares may be examined to establish if they are expected to provide a satisfactory return for the systematic risk they involve.
Using CAPM, the required return is:

For each stock, the expected return (= the total return) is the dividend yield plus the capital gains yield.

Recommendation:

• Sell shares in Dashing plc and Fantastic plc due to their lower-than-required returns relative to systematic risk.
• Buy additional shares in Elegant plc, which yields a positive abnormal return of 2.76%.
• Hold shares in Gaudy plc as its return aligns with the required return (zero alpha).

This analysis accounts for systematic risk only. If Bettaluck is not diversified, this systematic risk alone may underestimate the actual risk exposure of these investments.

• Default Risk: Risk of not receiving interest or principal payments on time. Most short-term investments are in low-risk securities.
• Price Risk: Fluctuations in the value of securities due to interest rate changes. Financial managers typically avoid high price risk for short-term holdings.
• Marketability: Securities should be easily sellable at short notice without significant loss of value.
• Tax Considerations: Special tax treatments or liabilities for certain investments may affect the overall return.
• Yield: Striking a balance between the highest yield available and acceptable risk and liquidity.
• Foreign Exchange Risk: For securities not in the domestic currency, exchange rate fluctuations must be managed.
• Investment Amount: Some marketable securities have minimum investment thresholds.
• Investment Horizon: The chosen security should match the timing of Bettaluck’s cash flow needs.