9. A portfolio manager is considering the benefits of increasing her diversification by investing overseas.

She can purchase shares in individual country funds with the following characteristics:
United United Spain States (%) Kingdom (%) (%)
Expected return 15 12 5 Standard deviation of return 10 9 4 Correlation with the United States 1.0 0.33 0.06

(a) What are the expected return and standard deviation of return of a portfolio with 25% invested in the United Kingdom and 75% in the United States?

(b) What are the expected return and standard deviation of return of a portfolio with 25% invested in Spain and 75% in the United States?

(c) Calculate the expected return and standard deviation of return of a portfolio with 50% invested in the United States and 50% in the United Kingdom; with 50% invested in the United States and 50% invested in Spain.

(d) Calculate the expected return and standard deviation of return of a portfolio with 25% invested in the United States and 75% in the United Kingdom; with 25% invested in the United States and 75% invested in Spain.

(e) Plot these two sets of risk-return combinations (parts a through d), as in Figure 15.5. Which leads to a better set of risk-return choices, Spain or the United Kingdom?
(

f) How can you achieve an even better risk-return combination?