FINANCIAL MODELING

15 Question 6 Consider a jazz company that needs to invest R1 million to host a concert on 30 October 2021. It is expected that the concert will yield R3 million on the R1 million investment. If it rains, the company will lose all of its investment. There is a 50% chance that it will rain on the day of the concert. However, the company can buy rain insurance for 50 cents on the rand. That is, for each 50 cents of rain insurance, the company will receive R1 if it rains. The company can purchase as much rain insurance as desired up to a face value of R3 million. 6.1 Write down the expected rate of return on this investment if the company buys v units of insurance. (The cost of insurance is in addition to its R1 million investment.) [6] 6.2 How much insurance should be purchased to minimise the variance in the return on this investment? 17] 6.3 Determine the minimum variance and expected rate of return on this investment [2] 15 Question 6 Consider a jazz company that needs to invest R1 million to host a concert on 30 October 2021. It is expected that the concert will yield R3 million on the R1 million investment. If it rains, the company will lose all of its investment. There is a 50% chance that it will rain on the day of the concert. However, the company can buy rain insurance for 50 cents on the rand. That is, for each 50 cents of rain insurance, the company will receive R1 if it rains. The company can purchase as much rain insurance as desired up to a face value of R3 million. 6.1 Write down the expected rate of return on this investment if the company buys v units of insurance. (The cost of insurance is in addition to its R1 million investment.) [6] 6.2 How much insurance should be purchased to minimise the variance in the return on this investment? 17] 6.3 Determine the minimum variance and expected rate of return on this investment [2]