Question
You have been instructed to assist your direct manager, who is extremely risk-averse, to make a decision between two investments, A and B. Both investments
You have been instructed to assist your direct manager, who is extremely risk-averse, to make a decision between two investments, A and B. Both investments require an initial investment of R300 000, and they both have a most likely annual return of 15%. Your manager has brainstormed three scenarios (pessimistic, most likely and optimistic), and the expected annual returns associated with each possible scenario. The estimated returns associated with the three possible scenarios for assets A and B are detailed in the table below. Asset A Asset B Initial investment R300 000 R300 000 Annual rate of return Pessimistic 10% 5% Most likely 15% 15% Optimistic 18% 20% Explain to your manager, and demonstrate, how to conduct a scenario analysis. Based on this analysis, discuss which asset is likely to be chosen and why.
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