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Based on the following information on two assets A and B answer questions a and...

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Question

Finance

Based on the following information on two assets A and B answer questions a and b.

A

B

Average Return

12.50%

10.50%

Standard Deviation

20.00%

15.00%

  1. If the correlation coefficient between asset A and B is 0.40, what is the least risky combination of these two assets?

(5 marks)

  1. Assuming you can borrow and lend at the risk free rate of return of 2.5%, how much you should invest in the portfolio (comprising of security A and security B) and the risk free asset so that the combination of risky portfolio (comprising of security A and security B) and the risk free asset provides 10% return. How much would be invested in security A, security B, and the risk free asset and what would be the risk of the new portfolio?

(15 marks)

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