1. Suppose Emma holds a well-diversified stock portfolio. Her son, Andrew, who is a portfolio manager, has just advised her not to invest in stocks of oil refining industry because their prices tend to have much higher volatility relative to other stocks. Is Andrews advice sound? Explain. (6 marks)

2. Karen currently has $5 million invested in a long-term bond fund which has an expected return of 7% and a standard deviation of 18%. Her son, Michael, recommends her to consider changing to invest 30% of the $5 million in an equity fund and the remainder in the bond fund. The equity fund has an expected return of 16% and a standard deviation of 35%. The correlation between the fund returns is 0.1. Should Karen follow Michaels recommendation? Explain with calculations. (8 marks)

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