Determine the expected return and risk of a portfolio with Dalmatia and Roma where 40% of the portfolio is invested in Dalmatia and 60% is invested in Roma.

Financialfor Decision-MakingOctober2020 AssignmentPage 3of 171.1

Determine the expected return and risk of a portfolio with Dalmatia and Roma where 40% of the portfolio is invested in Dalmatia and 60% is invested in Roma.

You must also discuss whether you such portfolio should be invested in and why.

Financial for Decision-Making October2020 Assignment Page 2of 17 QUESTION 1:

Read the case study/ scenario below and answer the questions based on the case study.

You are currently in the process of reviewing two investments namely Dalmatia Limited and Roma Limited.

Below are the calculations that you have performed so far: Risk and Return Calculations:

Dalmatia Probability Return Mean Probability (return -mean) ^2Variance0.6510.006.500.65*((10-10.7)^2) 0.320.3512.004.200.35*((12-10.7)^2) 0.5910.70ό20.91Standard

Deviation0.95Roma Probability Return Mean Probability (return -mean) ^2Variance0.652214.300.65*((22-14.30)^2)38.540.35-2-0.700.35*((-2-13.60)^2)92.9913.60ό2131.53Standard Deviation11.47Covariance and Correlation Calculations:

Probability(Return NF -Mean NF) x (Return SL x Mean SL)Covariance0.65(10 -10.70)*(14.30-13.60)-0.49-0.320.35(12 -10.70)*(-2 -13.60)-20.28-7.10Covariance of Returns-7.42Correlation = Covariance/SD of NF x SD of SL = -7.42 / (0.95 x 11.47) = -0.68The following additional information is available:

•Risk free rate is 3%

•Market Return is 12%

•Market standard deviation 25.2

•Covariance of NF shares in relation to the market is 25.2

•Covariance of SL shares in relation to the market is 39.6•All calculationsmust be rounded to two decimal points.

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