Question 1 The directors of Lancelot plc have evaluated the internal rates of return (IRR) on two potential projects, whose returns depend on the future states of the economy. State of the economy Probability Full Brexit 0.3 Partial Brexit 0.4 No-Brexit 0.3 IRRA 27% 18% 5% IRRB 35% 15% 20% If either project (or a combination of both) is accepted, the size of Lancelot's investment will double. Required: (i) Explain how Lancelot could construct a portfolio of these two projects to produce an expected return of 20%? (ii) Calculate the correlation between projects A and B, and evaluate the risk of the portfolio constructed in part (i). (iii) If Lancelot's existing activities have a standard deviation of 10% and a correlation coefficient with the new project portfolio of 0.8, how does the adoption of the new project portfolio in (i) and (ii) affect Lancelot's risk?