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QUESTION 3 [30 MARKS] The common stock of IBL and TERRA have the expected returns and standard deviations given below. The expected correlation coefficient between
QUESTION 3 [30 MARKS] The common stock of IBL and TERRA have the expected returns and standard deviations given below. The expected correlation coefficient between the two stocks is -0.35. Common Stock IBL Common Stock TERRA Expected Return 0.10 0.06 Standard Deviation 0.05 0.04 Assume that the portfolio comprises of 60% invested in the stock of IBL and 40% invested in the stock of TERRA. CALCULATE (a) (i) The expected return of the portfolio (ii) The standard deviation of the portfolio (b) Differentiate between a risk seeker, risk averse and risk neutral person. (6 marks) (8 marks) (6 marks) (c) There are two elements of risk attached to any security: systematic (market) and unsystematic (specific). Explain the difference between these two elements of risk. Use a diagram to enhance your argument(s). (10 marks)
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