A portfolio consists of three securities Durian, Mulberry and Star with the following

parameters:

An investor can either invest in Portfolio $1$ or Portfolio $2$ in the proportion given below.

Required:

$($a$)$ Calculate the expected return and standard deviation for each of the two portfolios $(2$

Decimal Places$).[21$ Marks$]$

$($b$)$ Explain the diversification effect and the relationship between correlation of assets.

$[6$ Marks$]$

Durian Mulberry Star

Expected return $(\%)12814$

Standard deviation $(\%)524$

Correlation coefficnet $($Cor$.)$:

Durian & Mulberry $-0\mathrm{.}75$

Mulberry & Star $0\mathrm{.}35$

Durian & Star $-0\mathrm{.}65$

Durian Mulberry Star

Portfolio:

$1206515$

$2402040$

Portfolio proportions $(\%)$