QUESTION THREE Rp. 65 Consider a 12 months potential investment in two securities. Security 1 has an expected return of 6% per annum and that of security 2 is 8% per annum. The standard deviation of the returns for security 1 9% and for security 2 it is 10%. The risk-free rate is 6.5% and the correlation between the two securities is 0.4. Eh, = 6 ER.- 8 Required: Corr op o -9 10 A. Which combination of the two securities will result in expected returns that exceed the risk free rate? [6 Marks] B. What is the portfolio volatility for each of the combinations identified in (a) above? [6 Marks] C. Which of all the possible portfolios lie on the efficient frontier? [8 Marks] ER ER [TOTAL: 20 MARKS] a QUESTION THREE Rp. 65 Consider a 12 months potential investment in two securities. Security 1 has an expected return of 6% per annum and that of security 2 is 8% per annum. The standard deviation of the returns for security 1 9% and for security 2 it is 10%. The risk-free rate is 6.5% and the correlation between the two securities is 0.4. Eh, = 6 ER.- 8 Required: Corr op o -9 10 A. Which combination of the two securities will result in expected returns that exceed the risk free rate? [6 Marks] B. What is the portfolio volatility for each of the combinations identified in (a) above? [6 Marks] C. Which of all the possible portfolios lie on the efficient frontier? [8 Marks] ER ER [TOTAL: 20 MARKS] a