Question 1 (20 marks)

Fund A offer an expected return of 8% with a standard deviation of 15%, and Fund B offers an expected return of 5% with a standard deviation of 25%.

1. Would Fund B be held by investors? Explain with the aid of a diagram using Markowitz Portfolio theory. (8 marks)
2. How would you answer part a. if the correlation coefficient between Funds A and B were 1? Could these expected returns and standard deviations represent an equilibrium in the market? (12 marks)