Question 1 The following information relates to two investments held by a company as part of its portfolio of investments The possible economic scenarios and expected returns have been provided below The investment in Agric Notes represents sixty percent of the portfolio with the remainder in Ordinary shares Scenarios Probability Return on Agric Notes ($) Return on Ordinary Shares ($) Bumper Harvest 0 2 25 000 9 000 Normal Harvest 035 20 000 11 000 Low Harvest 0 3 18 000 22 000 Drought 0 15 10 000 28 000 Required Determine the annual expected return for each scenario for this portfolio (4 marks) If the target of the company is to get at least $15 500 annum from funds invested, does this portfolio presents such prospect overally Support your answer with workings (8 marks) Compute the risk of each investment in the portfolio if it were to stand alone and which one has greater risk Use the standard deviation (8 marks) Determine the portfolio risk as measured by standard deviation and comment on whether diversification is possible or not, by combining these investments (6 marks) If the objective of the portfolio manager is not to have expected returns fluctuating by more than $1 500 annum Can it be concluded that this portfolio is ideal for the company and why (4 marks)

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Question 1 The following information relates to two investments held by a company as part of its portfolio of investments. The possible economic scenarios and

Question 1

The following information relates to two investments held by a company as part of its portfolio of investments. The possible economic scenarios and expected returns have been provided below. The investment in Agric Notes represents sixty percent of the portfolio with the remainder in Ordinary shares.

Scenarios	Probability	Return on Agric Notes ($)	Return on Ordinary Shares ($)
Bumper Harvest	0.2	25 000	9 000
Normal Harvest	035	20 000	11 000
Low Harvest	0.3	18 000	22 000
Drought	0.15	10 000	28 000

Required

Determine the annual expected return for each scenario for this portfolio. (4 marks)
If the target of the company is to get at least $15 500/ annum from funds invested, does this portfolio presents such prospect overally? Support your answer with workings (8 marks)
Compute the risk of each investment in the portfolio if it were to stand alone and which one has greater risk. Use the standard deviation. (8 marks)
Determine the portfolio risk as measured by standard deviation and comment on whether diversification is possible or not, by combining these investments.(6 marks)
If the objective of the portfolio manager is not to have expected returns fluctuating by more than $1 500/annum. Can it be concluded that this portfolio is ideal for the company and why? (4 marks)