You have $$50$ million for investing. You consider the following asset allocation; $$20$ million in

fund $A,$$$30$ million in fund $B.$ Fund A and fund $B$ correlation is $0\mathrm{.}85$

Expected Return Standard Deviation

Fund $A$

$20\%$

$14\%$

Fund $B$

$25\%$

$20\%$

a$.$ Calculate the portfolio expected return and standard deviation.

b$.$ Fund $C$ is also available:

Expected Standard

Return Deviation

Fund C $25\%,22\%$

Fund $C$ has a Zero correlation with fund $A$; You consider selling all fund $B$ holdings and

investing all the proceeds in the new fund $C.$ Your colleague states that since fund $C$ has

higher standard deviation than $B,$ it is not a prudent investment. Do you agree? Show your

arguments quantitatively.