(use the back of the page for more space) 2. Suppose the returns and the standard deviation to two different mutual funds, US stock funds (U) and Japan stock funds (J), are the following: Mutual funds US stock funds (U) Japan stock funds (J) Expected return (in %) Standard deviation (in %) 12 25 6 15 Suppose the correlation between both funds is 0.4. a. (8 points) If both U and J are open-ended funds, briefly explain one characteristic that are common to both funds. b. (10 points) How would a mix of both funds help reduce the risk investors face, and which type of risk will be reduced through asset diversification? c. (12 points) Complete the investment opportunity set of both U and J by filling in the missing values in the below table. Show ALL calculation steps to receive full credit. Weights on US stock (wy) 0 Expected return of risky 6 0.5 1 12 portfolio (P) Standard deviation of risky 15 portfolio (P) 25