Suppose that Alexander Co., a U.S.-based MNC, is trying to decide the location of a new project in which they plan to invest. Alexander can invest in the new project in either the United States or Germany. Upon completion, the project will comprise 50.00% of Alexanders total invested funds, with the remaining 50.00% being invested in the United States.

Forecasted information regarding the proposed project over a 5year period, including the 50.00% of funds invested in the existing business, are shown in the following table:

	Existing Business	Characteristics of Proposed Project
		Located in United States	Located in Germany
Mean expected annual return on investment (after taxes)	15.00%	25.00%	25.00%
Standard deviation of expected annual after-tax returns on investment	0.1	0.06	0.1
Correlation of expected annual aftertax returns on investment with aftertax returns of existing U.S. business		0.5	0.2

In the previous stage of this problem you found that the expected returns for either portfolio the potential portfolio with the Germany-based project and the potential portfolio with the U.S.-based project were identical. Thus, Alexander wishes to analyze the risk involved with investing in each of the projects, as measured by the variance of their overall portfolio under each scenario.

If Alexander invests in the U.S.-based project, the overall variance of their portfolio would be (0.0049, 0.0029, 0.009, 0.0031) . If Alexander invests in the Germany-based project, the overall variance of their portfolio would be (0.004, 0.002, 0.003, 0.006)