Asset $1$ :Expected return $4\%,$ Standard Deviation $7\%$

Asset $2$ : Expected return $9\%,$ Standard Deviation $7\%$

CALCULATE:

$($i$)$ The expected return of a portfolio where each asset has equal weights.

$(2$ marks$)$

$($ii$)$ The covariance of asset $1$ and $2,$ assuming that their correlation is $0\mathrm{.}3,$ and

comment on your result obtained.

$(4$ marks$)$

$($iii$)$ The variance of returns for the equally weighted portfolio and same covariance

in part $($b$)($ii$)$ above.

$($iv$)$ The standard deviation of returns for the equally weighted portfolio.

$(1$ marks$)$

$($v$)$ Suppose now that you need to constitute a new portfolio which should comprise

Asset $1$ and Asset $3($risk free asset$),$ which yield a rate of return of $4\%.$

Calculate the variance of such a portfolio if the assets have equal weights, and

comment on the result obtained.

$(4$ marks$)$

$($c$)$ According to theories and literature, what factors will constitute an optimum $($best$)$

and rebalanced investment portfolio, containing at least two risky assets?

$($d$)$ Using the appropriate diagram, explain in detail the concept of "Markowitz Efficient

Frontier".

$(7$ marks$)$

$($e$)$ Show how the Capital Market Line is derived with the introduction of a risk free

asset.

$(6$ marks$)$