QUESTION ONE

a) You are given the following information:

	i	i	iA	iB
Security A	15%	20%	1
Security B	25%	34%	0.35	1

Notation:

= Standard deviation of the rate of return on security i = A, B.

= Correlation coefficient between the rate of return on assets i and j.

_i = Expected rate of return on asset i.

i) Construct an equally weighted portfolio comprising of these two securities. Calculate the expected rate of return and the standard deviation of this portfolio (show all the details of your calculations).

[5 marks]

ii) Construct a portfolio comprising of 40% of security A and 60% of the security B. Calculate the expected rate of return and the standard deviation of this portfolio (show all the details of your calculations).

[5 marks]

iii) Compare the two portfolios in terms of their 'reward-to-volatility' ratio.

[5 marks]