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Calculate the expected return of dairy farmers

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The following table shows the possible states of the milk market for the coming year, and the returns Dairy Farmers Ltd and Magic Milkshakes Ltd expect under the different milk price scenarios.

Milk Market

Probability

Dairy Farmers Ltd Return

Magic Milkshakes Ltd Return

High Milk Prices

15%

15%

-18%

Average Milk Prices

55%

8%

12%

Low Milk Prices

30%

-10%

20%

(a) Calculate the expected return of Dairy Farmers Ltd, Magic Milkshakes Ltd and a portfolio with 60% of funds invested in Dairy Farmers Ltd and 40% invested in Magic Milkshakes Ltd.

(b) Calculate the risk of both the individual company expected returns, and the risk of the portfolio mentioned in (a). The correlation between the returns of the two companies is -0.2.

(c) Interpret your calculations in (a) and (b) regarding the expectations for the portfolio, assuming a normal distribution.

(d) Is the investor better off investing in the portfolio, or should he/she pick just one? Justify your recommendation.

Reference no: EM133076575

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