2. Consider a portfolio selection problem without short sales based on four securities in two industrial sectors (or groups) A and B. Securities 1 and 2 belong to sector A while securities 3 and 4 belong to sector B. The correlation amongst security returns within sector A is constant at pa=0.60 while the correlation amongst security returns within sector B is constant at p8 = 0.40. The returns of securities between sectors A and B are uncorrelated. The risk free return is rf = 3% while the returns and standard deviations of the four securities are as follows: 01 [41] 2 05] .09 . 12 08] = 02 03 L04 105 . 10 12 05 Lu4 a) Determine the relevant "cutoff rate applicable to each security (6 marks). b) Determine the optimal allocation of investment funds for each security. (6 marks). 2. Consider a portfolio selection problem without short sales based on four securities in two industrial sectors (or groups) A and B. Securities 1 and 2 belong to sector A while securities 3 and 4 belong to sector B. The correlation amongst security returns within sector A is constant at pa=0.60 while the correlation amongst security returns within sector B is constant at p8 = 0.40. The returns of securities between sectors A and B are uncorrelated. The risk free return is rf = 3% while the returns and standard deviations of the four securities are as follows: 01 [41] 2 05] .09 . 12 08] = 02 03 L04 105 . 10 12 05 Lu4 a) Determine the relevant "cutoff rate applicable to each security (6 marks). b) Determine the optimal allocation of investment funds for each security. (6 marks)