a) 'True diversification means spreading a portfolio of fixed size across many assets, not merely adding more risky assets to an ever-growing risky portfolio'. Do you agree with this statement? Explain your answer. (40 Marks) b) A pension fund manager is considering three mutual funds. The first one is a stock fund, the second one is a long term government and corporate bond fund and the third is a T-bill money market fund that yields a rate of 8%. Characteristics of the risky funds are as follows: The correlation between the fund returns is 0.10 (i) Determine the investment proportions of the minimum-variance portfolio made up of the two risky funds and calculate the expected return and standard deviation of its rate of return. (15 Marks) (ii) Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio. (10 Marks) (iii) What is the reward-to-volatility ratio of the best feasible Capital Allocation Line (CAL)? (5 Marks) (iv) You require that your portfolio yields an expected return of 14%, and that it is efficient, on the best feasible CAL, - What is the standard deviation of your portfolio? - What is the proportion invested in the T-bill fund and each of the two risky funds? (15 Marks) (v) If you were to use only two risky funds, and still require an expected return of 14%, what would be the investment proportions of your portfolio? Compare its standard deviation to that of the optimized portfolio in part (iv). What do you conclude? (15 Marks)