PUR Question 2 ... mox W KIXTH POFA PDF Information on two funds is collected as follows: Fund has an expected annual return of 8.25% and the standard deviation of its annual return is 6.34%. Fund 0 has an expected annual return of 12.28% and the standard deviation of its annual return is 9.83%. The correlation between the returns on the two funds is 0.61. The risk-free interest rate is 2.75% per annum. Required: (a) Construct an optimal portfolio with these two funds and solve for the weights of the two funds in the portfolio. (5 marks) (b) What are the expected return, and the risk measured by the standard deviation of return, of the portfolio you have made in (a)? (4 marks) (c) Construct a portfolio comprising the optimal portfolio and the risk-free asset, with a required expected return of 12.28% per annum. What is the weight of the risk-free asset in this new portfolio? What is the risk of the new portfolio? (4 marks) (d) Construct a portfolio comprising the optimal portfolio and the risk-free asset, with a required expected return of 8.25% per annum. What is the weight of the risk-free asset in this new portfolio? What is the risk of the new portfolio? (4 marks) (e) Discuss briefly the implications of diversification with your results in (c) and (d). (250 20% words approximately). (8 marks) (Total: 25 marks) Question 3