Sendos Bank has a portfolio of two projects worth R10 million . One project has an investment of R6million, expected return of 9 % and a standard deviation of 15%. The other project has an investment of R4million has an expected return of 4% and a standard deviation of 11%. It is determined that the covariance between the two projects is 4%.

Determine the expected return and standard deviation of the portfolio. (10marks)

Distinguish between project portfolio and financial portfolio. (5marks)

Incredible Gaming Company (IGC) is an educational gaming company specialising in young childrens educational games. IGC has just completed their fourth year of operation. The company is committed to launching 5 new monster trucks versions each April to take advantage of the summer season. IGC invited 2 finance professors to cover capital budgeting, explaining how to calculate the NPV and IRR, and stated that these should be used to screen potential projects and many other innovations that IGC bring into the market each year. Based on their calculation, the launching of 5 new trucks result in the negative NPV and very low IRR leading to the rejection of the project. However, one professor advised the project should be accepted based on its contribution to the organisations objectives and strategic plan. In the Q-and-A session, the ED Wilson, the Hector Gaming Companys CFO and the 2 government officials from the Ministry of Finance office argued in favour of non-financial criteria in selecting and ranking projects and vehemently rejected the NPV and IRR approach.

Give practical recommendations in favour of the CFO and the 2 government officials in soliciting for non-financial criteria when selecting and ranking potential projects. (10marks)