6. Suppose you are a typical mean-variance investor, currently invested 100% in a diversified New Zealand equity portfolio with expected return of 12.46% and volatility of 15.76%. You are considering adding the SMCAP fund to your portfolio. SMCAP invests in New Zealand small- capitalization, high technology firms and has an expected return of 15.69% and a volatility of 30.5%. You have determined its correlation with your current portfolio to be 0.6274. You are also intrigued by the EME fund, which invests in several emerging market economies. The expected return on this fund is only 12.5%; it has 34.5% volatility and a correlation of 0.25 with your current portfolio. The correlation between the SMCAP fund and the EME fund is 0.15. Assume that the risk-free rate is 4%. (a) Compute the investment hurdle rate for the SMCAP and the EME funds. (6 marks) (b) If you are interested in improving the Sharpe Ratio of your portfolio, which fund should you choose? Carefully explain your reasoning. (2 marks) 6. Suppose you are a typical mean-variance investor, currently invested 100% in a diversified New Zealand equity portfolio with expected return of 12.46% and volatility of 15.76%. You are considering adding the SMCAP fund to your portfolio. SMCAP invests in New Zealand small- capitalization, high technology firms and has an expected return of 15.69% and a volatility of 30.5%. You have determined its correlation with your current portfolio to be 0.6274. You are also intrigued by the EME fund, which invests in several emerging market economies. The expected return on this fund is only 12.5%; it has 34.5% volatility and a correlation of 0.25 with your current portfolio. The correlation between the SMCAP fund and the EME fund is 0.15. Assume that the risk-free rate is 4%. (a) Compute the investment hurdle rate for the SMCAP and the EME funds. (6 marks) (b) If you are interested in improving the Sharpe Ratio of your portfolio, which fund should you choose? Carefully explain your reasoning. (2 marks)