A. Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolios expected annual rate of return is 6%, and the annual standard deviation is 7%.

Amanda Reckonwith, Percivals financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poors 500 index. The index has an expected return of 17%, and its standard deviation is 20%.

a.

Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 4%.

	Yes
	No

b.

Could Percival do even better by investing equal amounts in the corporate bond portfolio and the index fund? The correlation between the bond portfolio and the index fund is +.2.

	Yes
	No

B. Ebenezer Scrooge has invested 55% of his money in share A and the remainder in share B. He assesses their prospects as follows:

	A		B
Expected return (%)	15		19
Standard deviation (%)	20		23
Correlation between returns		.3

a.	What are the expected return and standard deviation of returns on his portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Expected return	_____ %
Standard deviation	_____ %

b.	How would your answer change if the correlation coefficient were 0 or .3? (Round your answers to 2 decimal places.)

	Correlation Coefficient 0	Correlation Coefficient 0.3
Standard deviation	____ %	____ %