(a) It is commonly accepted that there are gains from adding securities to an investment portfolio. Explain what is meant by this statement. (Your answer should include a discussion and example regarding systematic and nonsystematic risk as well as an indication of the optimal number of assets to be included within a portfolio in theory and in practice.) (4 marks)

Click or tap here to enter text.

(b) The following table provides monthly percentage price changes for two well known market indexes.

Month Russell 2000

Nikkei 1 0.04 0.04 2 0.10 0.02 3 0.04 0.07 4 0.03 0.02 5 0.11 0.02 6 0.08 0.06

Answer the following: (6 marks) (i) What have you assumed about the distribution of data (that is, have you assumed the data is a sample or a population).

Click or tap here to enter text.

(ii) Calculate the expected monthly rate of return and standard deviation for each market index. (Hint: Use your calculator as no marks will be provided for working in this particular question.)

Click or tap here to enter text.

(iii) Calculate the correlation coefficient for Russell 2000 Nikkei. (Hint: Use your calculator as no marks will be provided for working in this particular question.)