You are given the scenarios below: Scenario Probability Return on Agric Notes Return on ordinary shares 1.
Question:
You are given the scenarios below:
Scenario | Probability | Return on Agric Notes | Return on ordinary shares |
1. Bumper harvest | 0.2 | 25,000 | 9,000 |
2. Normal harvest | 0.35 | 20,000 | 11,000 |
3. Low Harvest | 0.3 | 18,000 | 22,000 |
4. Drought | 0.15 | 10,000 | 28,000 |
Required:
a) Determine the annual expected return for each scenario for this portfolio (4)
b) If the target of the company is to get at least $15,500 per annum from funds invested, does this portfolio present such prospects overally? Support your answer with workings (8)
(c) 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 (8)
(d) Determine the portfolio risk as measured by standard deviation and comment on whether diversification is possible or not, by combining these investments (6)
(e) If the objective of the portfolio manager is not to have expected returns fluctuating by more than $1,500 per annum, can it be concluded that this portfolio is ideal for the company and why?
Understanding Basic Statistics
ISBN: 9781111827021
6th Edition
Authors: Charles Henry Brase, Corrinne Pellillo Brase