Investn The C "capita far Not co- this tim duns Trading portfoli S 'MO.18 Page 3 Section B (30 marks) Answer ALL questions in this section. Question 1 (10 marks) Consider two risky assets A and B. Stock A has an expected return of 15% and a standard deviation of 20%. Stock B has an expected return of 25% and a standard deviation of 40%. The variance of return of the portfolio is 729%2. a ) Calculate the expected return of the portfolio and the correlation coefficient of the two assets if the portfolio is formed with WB = 35%. (6 marks) b) Show with calculations that there is NO diversification benefit resulting from forming the portfolio. (4 marks) (a) E(Ip) = WA.E(rA) + WB.E(FB) = (1 - 0.35) x 15% + 0.35 x 25% = 18.5% 729%2 = (1 - 0.35)2 x (20%)2 + 0.352 x (40%)2 + 2x(1 - 0.35) x 0.35