a) i. Determine the expected return and risk of a two asset portfolio made up of 40 per cent of X and 6-0 per cent of Y given the following information
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Expected return
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Risk (Standard Deviation)
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Security X
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16 per cent
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18 per cent
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Security Y
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22 per cent
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30 per cent
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Correlation of X and Y = 0.25
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ii. The return on securities are independent and the average security has an expected return of 14 per cent with a standard deviation of 23 per cent. Determine the expected return and standard deviation of returns for a portfolio of 90 securities.
b) Explain what is meant by naïve diversification and consider some of the lessons to be derived from examining the consequences of increasing the number of randomly chosen securities held in a portfolio.