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 pe = 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: = 1.05] 09 Tu1 2 u3 Lu4 01 02 03 [04] 1.051 1.10 .12 . 12 08 05] 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 pe = 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: = 1.05] 09 Tu1 2 u3 Lu4 01 02 03 [04] 1.051 1.10 .12 . 12 08 05] 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)