Question 1 (8 marks) Your retirement plan lets you invest in a money market account and only one of two mutual funds: EWeight and VWeight. You are risk-averse. EWeight is an equally-weighted index of two stocks, while VWeight is a value-weighted index of the same two stocks. The money market return ry = 4%. The following is known about the expected returns of the two stocks: Stock 1 Stock 2 15% 25% E(r) Standard Deviation Correlation 1,2 Price / each share Number of shares outstanding 8% 15% 0.60 $100 200 million $50 100 million a. Compute the expected returns and standard deviations of EWeight and VWeight. (4 marks) b. Which option do you choose in your retirement plan: The money market and EWeight, or the money market and VWeight? Does the answer depend on your degree of risk aversion? Explain. (4 marks) Question 1 (8 marks) Your retirement plan lets you invest in a money market account and only one of two mutual funds: EWeight and VWeight. You are risk-averse. EWeight is an equally-weighted index of two stocks, while VWeight is a value-weighted index of the same two stocks. The money market return ry = 4%. The following is known about the expected returns of the two stocks: Stock 1 Stock 2 15% 25% E(r) Standard Deviation Correlation 1,2 Price / each share Number of shares outstanding 8% 15% 0.60 $100 200 million $50 100 million a. Compute the expected returns and standard deviations of EWeight and VWeight. (4 marks) b. Which option do you choose in your retirement plan: The money market and EWeight, or the money market and VWeight? Does the answer depend on your degree of risk aversion? Explain. (4 marks)