Question 1: Portfolio of Two Assets A fund manager (FM) is constructing a portfolio of two asset classes, a stock and a corporate bond. The return on the stock is 12%, and its standard deviation of return is 17%, while for the bond is 5% and its standard deviation is 12%. The correlation between their returns is -0.2. 1.1 If the FM requires a portfolio return of 9.2%, what should the proportions of each asset class be? (present your calculations) (5 marks) 1.2 What is the standard deviation of return of the above portfolio? (present your calculations) (5 marks) 1.3 Interpret the standard deviation of return of the portfolio in relation to the weighted average of the risk of those two assets (present your calculations). (5 marks) 1.4 Present, on a graph, the relationship between risk and return of the portfolio in 1.1. Identify the point (P) which would represent the portfolio. (5 marks) 1.5 Discuss the diversification benefits from the combination of those two assets. Relate to your graph. (5 marks) 1.6 What is the utility of an investor at point P (the portfolio in 1.1) with a risk aversion coefficient of 3? (5 marks) 1.7 Gold is owned by many rational investors as part of an extended portfolio. Why? (5 marks) Q1 Total: 35 marks