Please solve all the part completely in text form thanks Question 3: a) Critically discuss the effect

Please solve all the part completely in text form thanks

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Question 3: a) Critically discuss the effect of diversification on portfolio risk. Is there any limit to diversification? (20%) b) Consider that you are working as a fund manager and considering three mutual funds for your client. The first one is a stock fund, the second one is a long term government and corporate bond fund and the third is a T-bill money market fund that yields a rate of 6%. Characteristics of the risky funds are as follows: Expected return Stock fund (S) 18% Bond fund (B) 10% Standard deviation 25% 12% The correlation between the returns to funds S and B is 0.20 (i) Determine the investment proportions of the minimum-variance portfolio made up of the two risky funds and calculate the expected return and standard deviation of its rate of return. (20%) (ii) Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio. (15%) (iii) What is the reward-to-volatility ratio of the best feasible Capital Allocation Line (CAL)? (5%) (iv) You require that your portfolio yield an expected return of 20%, and that it be efficient, on the best feasible CAL, What is the standard deviation of your portfolio? What is the proportion invested in the T-bill fund and each of the two risky funds? (25%) (v) If you were to use only two risky funds, and still require an expected return of 20%, what would be the investment proportions of your portfolio? Compare its standard deviation to that of the optimized portfolio in part (iv). What do you conclude? (15%) Question 3: a) Critically discuss the effect of diversification on portfolio risk. Is there any limit to diversification? (20%) b) Consider that you are working as a fund manager and considering three mutual funds for your client. The first one is a stock fund, the second one is a long term government and corporate bond fund and the third is a T-bill money market fund that yields a rate of 6%. Characteristics of the risky funds are as follows: Expected return Stock fund (S) 18% Bond fund (B) 10% Standard deviation 25% 12% The correlation between the returns to funds S and B is 0.20 (i) Determine the investment proportions of the minimum-variance portfolio made up of the two risky funds and calculate the expected return and standard deviation of its rate of return. (20%) (ii) Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio. (15%) (iii) What is the reward-to-volatility ratio of the best feasible Capital Allocation Line (CAL)? (5%) (iv) You require that your portfolio yield an expected return of 20%, and that it be efficient, on the best feasible CAL, What is the standard deviation of your portfolio? What is the proportion invested in the T-bill fund and each of the two risky funds? (25%) (v) If you were to use only two risky funds, and still require an expected return of 20%, what would be the investment proportions of your portfolio? Compare its standard deviation to that of the optimized portfolio in part (iv). What do you conclude? (15%)