The past four years of stock returns for BHP and Rio Tinto are provided in the following table. The correlation between BHP and Rio Tinto is 0.4. Year BHP Rio Tinto 2015 4.50% 10.20% 2016 6.90% -5.70% 2017 8.70% 19.60% 2018 3.40% -7.70%

A. What is the average annual return for BHP and Rio Tinto? (4 marks)

B. What is the standard deviation of return for BHP and Rio Tinto? (5 marks)

C. Which stock would you invest? Explain. (2 marks)

D. Given the expected return for BHP and Rio Tinto calculated in part (a), what would be your portfolio return and standard deviation if you invested 50% of your capital in BHP and the remaining 50% in Rio Tinto? (4 marks)

E. What if you increase your capital invested in BHP from 50% to 70%? What is your portfolio return and standard deviation? Is this more or less favourable? Explain. (5 marks)