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22. Bob is considering investing in three shares A, B and C. The expected returns over the next year for A, B and C are
22. Bob is considering investing in three shares A, B and C. The expected returns over the next year for A, B and C are 8%, 6% and 5% respectively. The standard deviations for A, B and C are 10%, 7% and 6% respectively. The correlation between A and B is 0.4, the correlation between A and C is -0.2, and the correlation between B and C is -0.3. Bob is planning to invest 60% of his money in share A, 20% in share B and 20% in share C. a) Calculate the mean and standard deviation of the returns on Bob's portfolio. [2 marks] b) A friend of Bob has suggested that he should take the 20% of his money planned for share C and invest it in share D instead. Share D has the same expected return as share C, but is independent of shares A, B and C. Should Bob follow his friend's advice? Explain why or why not. [1 mark]
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