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 E[R] STDIR.)