The Executive Management Committee (EXCO) of Mining and Co wants to invest in the shares of two other companies associated with the mining industry, Ultra Ltd and Dynamic (Pty) Ltd. EXCO believes that an investment consisting of the shares of the two companies will add value to the company's investment portfolio. EXCO, however, is uncertain as to whether to invest in the individual shares or in a portfolio consisting of the two shares. Owing to the variable returns, Mining and Co is exposed to a certain degree of risk associated with the investments. EXCO considers Mining and Co as a rational yet conservative investor.

The following information regarding the two shares is at your disposal:

Ultra                                                       Dynamic

ProbabilityExpected return         Probability  Expected return

25%             8%                                    20%                 9%

35%             12%                                    30%                15%

40%             14%                                50%                18%

Required:

 

All calculations and round off answers to two decimals.

1.1. Use the information provided in the to calculate the following:

 

1.1.1.Expected returns from both investments

 

1.1.2.Standard deviation of both investments

 

1.1.3. Coefficient of variation of both investments

 

1.2. Calculate the portfolio return and standard deviation for a portfolio consisting of 45% Ultra shares and 55% Dynamic shares using the following information:  

Company                        Expected return                      Standard deviation

   Ultra                              11.80%                                       2.45%

   Dynamic                       15.10%                                       3.39%

The covariance between Ultra and Dynamic is 0.00. 

1.3 Based on your calculations, advise Mining and Co whether they should invest in Ultra and Dynamic separately, or in the proposed portfolio.