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QUESTION 1: Read the case study/ scenario below and answer the questions based on the case study. You are currently in the process of reviewing two investments namely Dalmatia Limited and Roma Limited. Below are the calculations that you have performed so far: Risk and Return Calculations: Dalmatia Probability (return - Probability Return Mean mean) ^2 Variance 0.65 10.00 6.50 0.65*((10-10.7)^2 .32 0.35 12.00 4.20 0.35*((12-10.7)^2) 0.59 10.70 62 0.91 Standard Deviation 0.95 Roma Probability (return - Probability Return Mean mean) ^2 Variance 0.65 22 14.30 0.65*((22-14.30)^2) 38.54 0.35 -2 -0.70 0.35*((-2-13.60)^2) 92.99 13.60 62 131.53 Standard Deviation 11.47 Covariance and Correlation Calculations: (Return NF - Mean NF) x (Return SL x Mean Probability SL) Covariance 0.65 (10 - 10.70)*(14.30- 13.60) -0.49 0.32 0.35 (12 - 10.70)*(-2 - 13.60) 20.28 -7.10 Covariance of Returns -7.42 Correlation = Covariance/SD of NF x SD of SL = -7.42 / (0.95 x 11.47) = -0.68 The following additional information is available: Risk free rate is 3% Market Return is 12% Market standard deviation 25.2 Covariance of NF shares in relation to the market is 25.2 Covariance of SL shares in relation to the market is 39.6 All calculations must be rounded to two decimal points. Financial for Decision-Making October 2020 Assignment Page 2 of 171.1 Determine the expected return and risk of a portfolio with Dalmatia and Roma where 40% of the portfolio is invested in Dalmatia and 60% is invested in Roma. You must also discuss whether you such portfolio should be invested in and why. The following formula should be used to determine the risk of the portfolio: _ ('2 2 2 2 1.2 Calculate the required return for Dalmatia using the Capital Asset Pricing Model (CAPM) and discuss whether you would invest in such share. Use the following formula to calculate Beta: Covaria nce (Ri, Rm) Beta = Variance (Rm) (16) (9) [25 marks] Financial for DecisionMaking October 2020 Assignment Page 3 of 17