3.

Bob is considering investing in two shares A and B. The expected returns over the next year for A and B are 10% and 5%, respectively. The standard deviations for A and B are 10% and 6% respectively. The correlation between A and B is 0.4.

Bob is planning to invest 60% of his money in share A and 40% in share B.

1. a) Calculate the expected return on Bobs portfolio.

2. b) Calculate the variance of the return on Bobs portfolio.

[2 marks]

[3 marks]

c) What is the probability that Bobs planned portfolio will earn a negative return over the next year? Assume that shares A and B follow a multivariate normal distribution.

0.0042 0.0646, 0.0053 0.0730, 0.0160 0.1265.