QUESTION ONE

$(40$ Marks$)$

Scott Manufacturers is looking to invest in the stock market. They have obtained the following projected estimates for shares A and $M$ :

$\backslash$table$[[\backslash$table$[[$State of the$],[$Economy$]],\backslash$table$[[$Probability of State$],[$Occurring$]],$Estimated Return if State Occurs$],[$A$,$M$,],[0\mathrm{.}3,10\%,9\%],[$Average$,0\mathrm{.}5,14\%,13\%],[$Boom$,0\mathrm{.}2,16\%,18\%]]$

Required:

$1\mathrm{.}1.$ Calculate which of the two investments would have the greatest total risk.

$(15$ marks$)$

$1\mathrm{.}2.$ Rank the two investments on the basis of $($i$)$ expected return and $($ii$)$ risk, and use your rankings to

$(3$ marks$)$

motivate which investment you would choose. You may assume that Scott Manufacturers is a conservative company.

$1\mathrm{.}3.$ Calculate the extent to which the returns of the two shares move together. You must also interpret your

$(12$ marks$)$

answer and comment on the benefit $($or lack thereof$)$ of combining both shares in the same portfolio.

$1\mathrm{.}4.$ Now suppose that Scott Manufacturers decides to invest R $30000$ of its available funds in A$,$ and R$70$

$(10$ marks$)$

$000$ in M: Calculate the variance of this portfolio.