Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolios expected annual rate of return is 11%, and the annual standard deviation is 11%. Amanda Reckonwith, Percivals financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poors 500 index. The index has an expected return of 16%, and its standard deviation is 17%.

a. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 6%.

multiple choice Yes No

b. Could Percival do even better by investing equal amounts in the corporate bond portfolio and the index fund? The correlation between the bond portfolio and the index fund is +0.1.

multiple choice Yes No