A firm has an existing portfolio of projects with an expected return of 11 percent a year. The standard deviation of these returns is 4 percent. The existing portfolios value is $820,000. As financial manager, you are considering the addition of a new project, PROJ1. PROJ1s expected return is 13 percent with a standard deviation of 5 percent. The initial cash outlay for PROJ1 is expected to be $194,000.

e.Assume the correlation coefficient of the cash flows of the existing portfolio and PROJ1 is zero. Calculate the standard deviation of the combined portfolio. Is the standard deviation of the combined portfolio higher or lower than the standard deviation of the existing portfolio?

f.Calculate the coefficient of variation of the combined portfolio.

g.If PROJ1 is added to the existing portfolio, will the firms risk increase or decrease?