Q$2.$ Mr$.$ A$$s current portfolio of Rs $2$ lac is invested as follows:

Value $($Rs$)$ Proportion E $($R $)$ SD

Govt. Bond

Large cap stock

Small cap stock

Total portfolio

$20,000$

$60,000$

$1,20,000$

$2,00,000$

$10\%$

$30\%$

$60\%$

$100\%$

$4\mathrm{.}6\%$

$12\mathrm{.}4\%$

$16\mathrm{.}0\%$

$13\mathrm{.}8\%$

$1\mathrm{.}6\%$

$19\mathrm{.}5\%$

$29\mathrm{.}9\%$

$23\mathrm{.}1\%$

A is expecting to get an amount of additional Rs$2$ lac and plans to invest the entire

amount in an index fund that best complements the current portfolio. Mr$.$ B is evaluating

the four index funds shown in the following table for their ability to produce a portfolio

that will meet two criteria relative to the current portfolio:

$1.$ Maintain or enhance expected return and

$2.$ Maintain or reduce volatility.

Each fund is invested in an asset class that is not substantially represented in the current

portfolio.

Index Fund Characteristics

Index Fund E$($R$)$ SD Correlation of Returns with the current portfolio

A

B

C

D

$15\%$

$11$

$16$

$14$

$25\%$

$22$

$25$

$22$

$0\mathrm{.}80$

$0\mathrm{.}60$

$0\mathrm{.}90$

$0\mathrm{.}65$