Part a):Below are the net cash flows for two mutually exclusive projects Alpha and Beta. If the required return is 10% pa, which project/s should be selected, assuming the projects can be repeated? Explain your choice.

01234Project Alpha(2000)15001500Project Beta(4800)1800180018001800

Part b:You currently have all your funds invested in a portfolio of shares of Polycorp (PLC). The shares have an expected return of 11%pa and a standard deviation of 21%pa. You are offered the opportunity to invest in two funds managed by the Rearguard Portfolio Management Company. One is a Bond Fund that has an expected return of 5%pa and a standard deviation of 5%pa. The other fund is one that tracks the market index and has an expected return of 14%pa and a standard deviation of 22%pa. The correlation between the index fund and the bond fund is 0.15. Construct a portfolio of the Index and Bond funds that gives the same expected return as a portfolio of Polycorp shares. What is the composition and standard deviation of this portfolio? Use this example to comment on the benefits of diversification.