QUESTION 2 [25 MARKS]

(a) An investor holds two equity shares x and y in equal proportion with the following risk and return characteristics:

E(Rx) = 25%; E(Ry) = 19%

= 29%; = 24%

The returns of these securities have a positive correlation coefficient of 0.6. Calculate the portfolio return and risk. [8 Marks]

(b) Total risk of an individual security normally consists of two parts namely, the systematic and unsystematic risks. Explain the systematic and unsystematic risks with examples. [10 Marks]

(c) Elaborate how an investor should proceed to choose an optimal portfolio using the indifference curve. [7 Marks]