Consider following portfolio: Portfolio Industry Weight Expected Return Standard Derivation Stock W (50%) Financial 16%p.a. 30%p.a....

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Consider following portfolio: Portfolio Industry Weight Expected Return Standard Derivation Stock W (50%) Financial 16%p.a. 30%p.a. Stock X (30%) Real Estate 18% p.a. 25%p.a. Stock Y (10%) Hospitality 12% p.a. 15%p.a. Stock Z (10%) Utilities 7% p.a. 5%p.a. (i) Calculate the expected return of above portfolio. (2 marks) (ii) Explain the purpose of diversification? Is it possible to diversify away all the risk? (2 marks) (iii) The expected return of Stock X (18% p.a.) is higher than that of Stock W (16% p.a.), while the Standard deviation of Stock X (25% p.a.) is less than that of Stock W (30%p.a.). Does it necessarily violate the risk-return tradeoff principle? Justify your answer. (4 marks) (iv) The portfolio standard derivation would most likely higher than, equal to or lower than 24.5%p.a.? Justify your answer with appropriate assumption. (5 marks) Consider following portfolio: Portfolio Industry Weight Expected Return Standard Derivation Stock W (50%) Financial 16%p.a. 30%p.a. Stock X (30%) Real Estate 18% p.a. 25%p.a. Stock Y (10%) Hospitality 12% p.a. 15%p.a. Stock Z (10%) Utilities 7% p.a. 5%p.a. (i) Calculate the expected return of above portfolio. (2 marks) (ii) Explain the purpose of diversification? Is it possible to diversify away all the risk? (2 marks) (iii) The expected return of Stock X (18% p.a.) is higher than that of Stock W (16% p.a.), while the Standard deviation of Stock X (25% p.a.) is less than that of Stock W (30%p.a.). Does it necessarily violate the risk-return tradeoff principle? Justify your answer. (4 marks) (iv) The portfolio standard derivation would most likely higher than, equal to or lower than 24.5%p.a.? Justify your answer with appropriate assumption. (5 marks)

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