The following table provides the expected return and standard deviation of returns (risk) for two funds managed by Arlo Securities. The risk-free rate from investing in a government bond is currently 2%.

	Arlo Global	Arlo Small Firms
Expected return	8%	20%
Standard deviation	12%	24%

You have a new client who wishes to invest 50% of his money in the risk-free rate and 50% in one of the Arlo funds.

(i) Calculate the expected return and risk for combining Arlo Global with the government bond and Arlo Small Firms with the same government bond.

(ii) This client then indicates he would definitely prefer to invest at least 50% of his money in the Arlo Global fund and requires an expected return of 6%. What proportion of his money does he invest in the risk-free government bond and what is the standard deviation of this portfolio?

(iii) A different client then asks if he could combine the Arlo Small Firms fund with the risk-free bond and reduce the risk of this combined portfolio to 12%. Calculate the proportion of his money to invest in Arlo Small Firms and the expected return of this portfolio.

(b) This week you meet Alice who has no previous knowledge of investment but has recently inherited 200,000 after the death of an elderly relative. Explain to her the key differences between active and passive investment funds and comment on their performance in light of their returns.