You are a new investor in the stock market. You have just establish a portfolio of $900 in share A

and $1,300 in share B. Below is the dat information of your portfolio:

Shares	A	B
Expected return	10%	14%
Standard Deviation of return	5%	8%
Correlation of coefficient (p)	0.5

Required:

1. Would you rather have co-efficient correlation for the two shares in your portfolio positive or negative as it is at the present? Please eplain why (1 mark)

ANSWER: ** Answer box will enlarge as you type

2. Assume that beta coeeficient of the stock B in your new portfolio is 1.3. The expected return of this stock is as shown in the above table, the risk-free rate of return is 5%, calculate the market risk premium using Capital Asset Pricing Model (CAPM). (1 mark)

ANSWER:

3. Calculate the expected return of your portfolio and identify the risk of portfolio returns by computing portfolio standard deviation (4 marks)

ANSWER:

4. You also consider to open a new super account, the superannuation manager you approached offers you an investment portfolio which had the returns of 14.5%, - 7.5%, 16.7% and 17.2% over the past four years, respectively. Compute geometric average return of this portfolio to have an idea of the portfolio actual return over the four year period. (1 mark)