INSTRUCTIONS: This question contains three (3) parts. Answer all parts of the questions. Clearly label your response to each part using bold text. For example: Part a): Your response...

(a) Figure 1 is a stylised plot of the expected return and standard deviation of returns for a variety of stocks. It also includes a plot of the portfolio combinations that produce the minimum standard deviation for a given level of return (solid, curved line). Finally, stocks A, B and C are highlighted (large dots).

Based on this figure, discuss why there is no positive risk/return relationship between stocks A, B and C, and highlight why a risk averse investor prefers one of these stocks over the other two.

(3 marks)

Figure 1

(b) Using the information in Table 1, calculate the expected return, standard deviation of returns and covariance of returns with the market (Mkt) returns of an investors portfolio that consists of a 60% investment in Asset X and a 40% investment in Asset Y.

Table 1

Asset	E(Ri)	STD(Ri)	COV(Ri,RY)	COV(Ri,Tmkt)
X	0.10	0.20	0.042	0.020
Y	0.20	0.30	0.090	0.060

(6 marks)

(c) Given your answer to (b), outline two (2) way the investor could adjust their portfolio to decrease the standard deviation of returns of their portfolio.

Figure 1 E[R] B STD(RA) STD(RB)