Question: Question 2 Consider two assets with their annual expected return (ER), risk (SD) and correlation shown as follows: Question 2 (10 marks) Consider two assets

Question 2 Consider two assets with their annual expected return (ER), risk (SD) and correlation shown as follows:

Question 2 (10 marks) Consider two assets with their annual expected return (ER), risk (SD) and correlation shown as follows: Asset ER SD X 12% 28% Y 20% 42% Correlation X Y X l 0.3 Y 0.3 l (a) If an investor wants to invest in a portfolio with SD = 35%, what will be the optimal portfolio weights allocated to Asset X and Y? (b) Suppose that the investor can borrow funds at the cost of 4% p.a. How would you construct an optimal portfolio if the investor wants to achieve 28% return p.a

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