TOPIC PORTFOLIO ANALYSIS show all workings step by step Question 1 M M (Pvt) Ltd, a small entity in the mining industry is involved in operations that result in the company having stocks of cash resource The company has thus decided to create a portfolio of investments comprising of agriculture notes, a debt instrument, and ordinary shares of a company that is into telecommunications The intended investment in Agriculture Notes is sixty percent and the remainder in ordinary shares Forecasts have shown the following possibilities in as far as scenarios and their chances of occurring as well as annual returns are concerned Scenarios Probability Return on Agric Notes ($) Return on Ordinary Shares ($) Booming Economy 0 3 25 000 10 000 Normal Economy 04 20 000 11 000 Depressed Economy 0 2 18 000 22 000 Recession 0 1 10 000 28 000 Required Determine the annual expected return for each scenario for this portfolio (8 marks) If the target of the company is to get at least $16 800 annum from funds invested, does this portfolio presents such prospect overally Support your answer with workings (5 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 (5 marks) Calculate the covariance of returns for the above investment and interpret (7 marks) Determine the correlation coefficient of investment returns in the portfolio and comment on their potential to reduce diversifiable risk (6 marks) Determine the portfolio risk as measured by standard deviation and comment on whether the portfolio has been constructed using correct investments (5 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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TOPIC: PORTFOLIO ANALYSIS show all workings step by step Question 1 M & M (Pvt) Ltd, a small entity in the mining industry is involved

TOPIC: PORTFOLIO ANALYSIS

show all workings step by step

Question 1

M & M (Pvt) Ltd, a small entity in the mining industry is involved in operations that result in the company having stocks of cash resource. The company has thus decided to create a portfolio of investments comprising of agriculture notes, a debt instrument, and ordinary shares of a company that is into telecommunications. The intended investment in Agriculture Notes is sixty percent and the remainder in ordinary shares. Forecasts have shown the following possibilities in as far as scenarios and their chances of occurring as well as annual returns are concerned.

Scenarios	Probability	Return on Agric Notes ($)	Return on Ordinary Shares ($)
Booming Economy	0.3	25 000	10 000
Normal Economy	04	20 000	11 000
Depressed Economy	0.2	18 000	22 000
Recession	0.1	10 000	28 000

Required

Determine the annual expected return for each scenario for this portfolio. (8 marks)
If the target of the company is to get at least $16 800/ annum from funds invested, does this portfolio presents such prospect overally? Support your answer with workings (5 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. (5 marks)
Calculate the covariance of returns for the above investment and interpret. (7 marks)
Determine the correlation coefficient of investment returns in the portfolio and comment on their potential to reduce diversifiable risk. (6 marks)
Determine the portfolio risk as measured by standard deviation and comment on whether the portfolio has been constructed using correct investments. (5 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)