Question 1 a. An investor invested 40% of his money in stock A and 60% in stock B and constructed a portfolio. The return data for both stock A and B are given below: Year Return on stock A (40%) Return on stock B (60%) 2009 2.34 -1.65 2010 5.21 2.15 2011 7.23 0.25 2012 4.12 5.32 2013 3.22 3.12 2014 5.96 2.15 2015 2.44 1.36 i. Calculate the correlation coefficient between stock A and stock B. ii. Calculate the portfolio standard deviation using the above data. iii. Will this portfolio selection reduce the risk efficiently? Please explain. (1 mark) (3 marks) (3 marks) b) The expected return on a portfolio of shares is 9% per annum and the portfolio has a beta of 1.2. If the expected return on the market portfolio is 8% per annum and the assumptions of the capital asset pricing model hold, what is the annual risk free rate of interest? Also calculate the market risk premium. (3 marks)