Share X and Share Y have the following returns with their respective probabilities. Share X Share Y Return Probability Return Probability 10% 0.3 15% 0.3 5% 0.3 1% 0.4 -4% 0.4 -10% 0.3 Calculate the following:

i) The expected rate of returns for both shares. (4 marks)

ii) The standard deviation for both shares. (5 marks)

iii) On a stand-alone basis, select which stock is the riskier. (2 marks)

b) Assume the correlation between the two shares is 0.5. Calculate the portfolio risk and return based on the following combinations:

Portfolio 1: 70% invested in Share X, 30% in Share Y

Portfolio 2: 50% invested in Share X, 50% in Share Y (6 marks)

c) If given that the correlation between the two shares above is -0.00103, comment on the overall portfolio risk and on the level of diversification.

Discuss the risk that can be reduced through diversification with relevant examples.