a. Murray wants to increase the expected return of his portfolio. State what action McKay should take to achieve Murray's objective. Justify your response in the context of the CML.

b. York wants to reduce the risk exposure of her portfolio but does not want to engage in borrowing or lending activities to do so. State what action McKay should take to achieve York's objective. Justify your response in the context of the SML. (15 marks)

Question Two:

You are an Investment Analyst at a fund management company, Northland Asset Management Ltd. You are asked to analyse the characteristics of two stocks, Wanaka Holdings Ltd and Pukaki Consolidated Ltd.

Below is a table showing some of the data you have gathered:

Stock

Wanaka

Beta

9.0

Standard Deviation

45%

Covariance with Market

0.0135

Pukaki

Beta

1.6

Standard Deviation

40%

In addition, you also know that the expected return on the NZX50 (the market index) is 15% and the risk-free rate of interest presently is 6%. Assume that you can borrow and lend at the risk - free rate.

a. Suppose the volatility (standard deviation) of the market is 15%. What is the Beta of Wanaka? What is Pukaki's covariance with the market? (15 marks)

b. What are the correlations between Wanaka and the market? What are the correlations between Pukaki and the market? (15 marks)

c. What would be the weight of Wanaka and Pukaki in a portfolio that has exactly the same expected rate of return as the market? (10 marks)