5. Optimal International Portfolio Diversification (advanced). Kaiwa is a U.S.-based value fund considering investing overseas to benefit from international diversification.

It is contemplating investing in the South Korea country fund that offers an expected return of 13 percent for a level of risk measured by the standard deviation of its return equal to 11 percent. Kaiwa’s current portfolio offers a lower return of 9 percent for a level of risk of 7 percent.

a. Assuming a correlation coefficient of 0.57 between the South Korea country fund and the U.S. Kaiwa fund, how would a repositioning of 33 percent of Kaiwa into the South Korea country fund impact its expected return and level of risk?

b. What would be the risk/return profile of a portfolio 66 percent invested in the South Korea country fund?

c. Sketch in a risk/return space the preceding two portfolio configurations as well as a portfolio 100 percent invested in Kaiwa and 100 percent invested in the South Korea country fund.