ASSETS		EXPECTED RATE OF RETURN(%)	RISK(%)
1	US TREASURY NOTE	2	0.75
2	Merrill Lynch Bond	5.7	2.5
3	JP Morgan Stock	7	3.5

An investor wants to set up a portfolio of TWO assets, by choosing two assets from the list of THREE assets given in the table above. In the portfolio, the investor wants to hold the two assets in equal proportions.

It has been estimated that the correlation coefficient between the return of the assets are as follows:

Correlation coefficient (return US treasury note, return Merril Lynch Bond)= - 0.5

Correlation coefficient (return US treasury note, return JP Morgan Stock)= - 0.3

Correlation coefficient (return Merril Lynch Bond, return JP Morgan Stock)= 0.6

Assume you are a portfolio manager and you must advise the investor in the investment decision.

(a) Detail how you would assess the performance of the portfolio pertaining to the investor and in which portfolio would you advise the investor to invest and why? (10 marks)

(b) Give the main difference/s that exists between the 2 debt securities: treasury note and the Merril Lynch Bond. (5 marks)

(c) In the following table, the market capitalization, expected rates of return, standard deviation and correlation coefficient of the three stocks issued by companies Moon, Star and Sun are given. An investor has set up a portfolio with the three stocks

				Correlation Coefficient	Correlation Coefficient	Correlation Coefficient
Stock/i	Market Capitalization(Rs)	E(Ri)/%	i/%(Risk)	Moon	Star	Sun
Moon	15000	8	7	1	0.5	-0.8
Star	5000	16	11	0.5	1	0.2
Sun	10000	12	9	-0.8	0.2	1

(i) Calculate the expected rate of return of the portfolio. (3 marks)

(ii) Assume that the investor decides to sell one of the stocks in the portfolio and keep a portfolio of two stocks. By taking into consideration that investors always want to minimize risk and maximize expected return, advise the investor which stock to sell.

Explain in details how you have proceeded to determine which stock should be sold. (7 marks).

(d) Discuss the differences between weak form, semi-strong form and strong form capital market efficiency (5 marks)