The following table provides the expected return and the standard deviation of returns for srocks and gold. Your client is currently holding a portfolio of stocks and he is considering whether he should replace half of the stocks with gold.

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Question 1 Part a) The following table provides the expected return and the standard deviation of returns for stocks and gold. Your client is currently holding a portfolio of stocks and he is considering whether he should replace haif of the stocks with gold. Expected retun Standard deviation24%- Stocks 16% Gold 12% 28%. Calculate the portfolio expected returns and standard deviation, and discuss how you would advise your client, based on the following information: i) If the correlation coefficient between the returns on gold and stocks was 0. (10 marks) i) If the correlation coefficient between the returns on gold and stocks was 1 . (10 marks) Part b) Discuss the concept of the two-fund separation theorem (10 marks) Part c) You are comparing the performance of two investment portfolios. One averaged 18% return and the other a 15% return. However, the beta of the first portfolio was 1.5, while that of the second was 0.9. i) If the T-bill rate was 5% and the market return during the period was 15%, which portfolio would generate superior risk-adjusted abnormal return according to CAPM? (10 marks) ii) Let time 0 be the present and Pi be the future value in time 1. The time value of money suggests that the present value of P can be calculated as Po= where k is the appropriate discount rate. Use the CAPM to derive what k should be. Does your result justify the use of risk free rate of return for k when there is no uncertainty on the (10 marks) (Total 50 marks) value of P/