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Holefoods plc wants to invest £1,500,000 for a three-year period. Inflation is currently 1.5% per annum and is expected to remain at this rate for the foreseeable future. The choice is between two possible investments. Over recent years, the frequency distribution of the actual returns achieved by the two investments has been observed, but there is no information available about the correlation between the two investments.
Investment R
Annual rate of return
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8%
22%
10%
28%
12%
24%
14%
26%
Investment S
Annual rate of return
Probability
1%
40%
9%
12%
18%
8%
35%
40%
· i.Calculate the expected rate of return and the standard deviation of the expected return for each of the investments. (6 marks)
· ii.Advise Holefoods how to choose between the two investments. Should Holefoods give any consideration to splitting their investment between the two investments? Justify your recommendation. (8 marks)
