(a) Villao plc. is an asset management company. It manages a two-asset portfolio which consists of two risky assets, A and B. The proportions of A and B held in the portfolio are 40% and 60%, respectively. The expected return of A and B are 12% and 8%, respectively. Standard deviations of A and B are 70% and 40%, respectively. The correlation coefficient between A and B is -0.6. i) Calculate the expected return and standard deviation of the two-asset portfolio. [6 marks] In light of the concept of portfolio diversification, make comments on the results from i). ii) [7 marks] (b) ManUnito plc. is a UK based pharmaceutical company, and the following information regarding the financial position of the company is provided by their financial director Ms. Jones: Number of shares outstanding 15,000,000 Market value of debt (AA rating) 30,000,000 Expected yield of the debt Corporate tax rate Risk-free rate Market risk premium Current share price Beta value of the share 8% 30% 3% 5% 2.00 1.60 In addition, Ms. Jones is considering two mutually exclusive projects by taking extra finance, and cash flows of each project are shown below: Points in time (yearly intervals) Project A () 0 1 2 3 -12,000 5,000 5,000 5,000 Project B () -10,000 4,000 4,000 4,000 i) Calculate the weighted average cost of capital of ManUnito plc. [8 marks] ii) Advise Ms. Jones which project to undertake by applying net present value (NPV) approach. Assuming weighted average cost of capital is the appropriate discount rate