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Question 1
The following information relates to two investments held by a company as part of its portfolio of investments. The possible economic scenarios and expected returns have been provided below. The investment in Agric Notes represents sixty percent of the portfolio with the remainder in Ordinary shares.
Scenarios Probability Return on Agric Notes ($) Return on Ordinary Shares ($)
Bumper Harvest 0.2 25 000 9 000
Normal Harvest 0.35 20 000 11 000
Low Harvest 0.3 18 000 22 000
Drought 0.15 10 000 28 000Required
a) Determine the annual expected return for each scenario for this portfolio. (4 marks)
b) If the target of the company is to get at least $15 500/ annum from funds invested, does this portfolio presents such prospect overally? Support your answer with workings (8 marks)
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 marks)
d) Determine the portfolio risk as measured by standard deviation and comment on whether diversification is possible or not, by combining these investments. (6 marks)
e) 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)(30 marks)
End of Paper
There is no point in simply typing out a full question and expecting to be provided with a full answer. You must have an answer in the same book in which you found the question and should therefore ask about whatever it is in the answer that you are not clear about and then we will explain.
However, and more importantly, portfolio theory calculations have not been examinable in Paper AFM for many years and so we will not be helping you anyway!!
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