Given below is the following information relating to two stocks X and Y from the Lusaka

securities exchange.

Standard deviation for stock X $12\%$

Standard deviation for stock Y $20\%$

Expected return for stock X $16\%$

Expected return for stock Y $22\%$

Treasury bills rate $7\%$

Expected return for the LuSe index $15\%$

Standard deviation for stock LuSe share

index $10\%$

Correlation coefficient between X and Y $0$:$30$

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i$)$You uncle is almost reaching retirement age he has K$100,000$ which he wants to invest in

one of the two stocks above basing on the individual life cycle theory which of the two stocks

would you advice you uncle to invest in$.(6$marks$)$

b$)$ You friend has suggested that instead of just investing in one of the stocks its better to invest

K$50,000$ in stock X and the other K$50,000$ in stock Y so as to diversify the risk. You have

asked you friend on how is has settled for the $50$:$50$ investment weights in X and Y he says

there is no basis but still insists that it is better option. Calculate the portfolio return if you

uncle follows your friends advice.$(6$ mark$)$

ii$)$ From you investment theory you know that you cannot just come up with the portfolio

asset mix anyhow as suggested by your friend. Using the Markowitz analysis, explain how

can you help you uncle to select an optimal portfolio combination?$(10$ marks$)$

iii$)$ Explain why the introduction of risk$-$free borrowing and lending is such an important

change relative to where the Markowitz analysis left off? $(10$ marks$)$

Calculate the Portfolio return if the portfolio standard deviation is $0\mathrm{.}17\%$ the rest of the data

is as above.