Question: An analyst has provided you with the following information about the common shares of two companies. Bloxom Inc. and Adelaide Ltd. Common Shares BloxomAdelaide Beta

An analyst has provided you with the following information about the common shares of two companies. Bloxom Inc. and Adelaide Ltd.

Common Shares Bloxom Adelaide

Beta                            1.25         0.8

Expected rate of return 9.5% 6.0%

Standard deviation of return 11% 16%

Market price of risk 5% 5%

Risk-free rate of return 2.5% 2.5%

Identify the circumstances in which an investment in both shares would lead to benefits from diversification. Provide an example of how such circumstances might arise.

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