Question 2 [36] A colleague of yours has taken an interest in investments. She is particularly interested in putting together a share portfolio and has identified two shares recommended to her by a seasoned investor. She is considering investing in the shares of companies in the communications industry and identified Talktech (Pty) Ltd and Aircom Ltd as the companies she wants to consider. She managed to collect the following investment and economic data relevant to the two companies. She is now seeking your assistance to help her analyse the data to enable her to make an informed investment decision. Economy Probability Expected return Talktech shares Expected return Aircom shares Pessimistic 0.20 6% 8% Normal 0.55 11% 15% Optimistic 0.25 13% 7% Additional information: . The rate of return on RSA 10-year treasury bonds is 8.91%. The current market return is 14%. The standard deviation of the market return is 2.5%. . The expected return on Aircom shares is 11.6% with a standard deviation of 3.8%. The expected return on Talktech shares is 10.5% with a standard deviation of 2.4%. Required: 2.1. Calculate the covariance of returns as well as the correlation between the two shares. (8) 2.2. Explain the extent of the relationship between Talktech and Aircom shares based on the results of the covariance and correlation. (9) 2.3. Calculate the expected portfolio return and portfolio risk based on a portfolio consisting of 45% Talktech shares and 55% Aircom shares. (12) Should your colleague invest in this portfolio? Give reasons for your recommendation. (7) 2.4. Question 2 [36] A colleague of yours has taken an interest in investments. She is particularly interested in putting together a share portfolio and has identified two shares recommended to her by a seasoned investor. She is considering investing in the shares of companies in the communications industry and identified Talktech (Pty) Ltd and Aircom Ltd as the companies she wants to consider. She managed to collect the following investment and economic data relevant to the two companies. She is now seeking your assistance to help her analyse the data to enable her to make an informed investment decision. Economy Probability Expected return Talktech shares Expected return Aircom shares Pessimistic 0.20 6% 8% Normal 0.55 11% 15% Optimistic 0.25 13% 7% Additional information: . The rate of return on RSA 10-year treasury bonds is 8.91%. The current market return is 14%. The standard deviation of the market return is 2.5%. . The expected return on Aircom shares is 11.6% with a standard deviation of 3.8%. The expected return on Talktech shares is 10.5% with a standard deviation of 2.4%. Required: 2.1. Calculate the covariance of returns as well as the correlation between the two shares. (8) 2.2. Explain the extent of the relationship between Talktech and Aircom shares based on the results of the covariance and correlation. (9) 2.3. Calculate the expected portfolio return and portfolio risk based on a portfolio consisting of 45% Talktech shares and 55% Aircom shares. (12) Should your colleague invest in this portfolio? Give reasons for your recommendation. (7) 2.4