QUESTION ONE a) You are given the following information: r PIA PiB 15.0% 10.0% 1 0.60 Security A Security B 20.0% 15.0% 0.60 1 Notation: o, Standard deviation of the rate of return on security i = A, B. Py = Correlation coefficient between the rate of return on assets i and j. 7 = 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). (10 marks) ii. Now assume that the correlation coefficient is -0.60 (instead of 0.60). Calculate again the standard deviation of the portfolio. (5 marks) iii. Briefly comment on the differences between questions (i) and (ii) (in maximum 150 words). What is the benefit, if any, from the lower correlation coefficient? (10 marks) b) The APT straight line is given by E(R) = E(R) + [E(I) E(R)]B. Suppose there are three portfolios on this straight line. Given the following information provided, answer the questions below: Mean Beta Specific Risk 15% 0.7 0 B 21% 1.3 0 ? 1.8 0 i. What is the slope of the APT line? (10 marks) ii. Calculate the E (R) (10 marks) iii. What is the expected rate of return on portfolio C