Section B

Consider following portfolio:

	Portfolio Weight	Industry	Expected Return	Standard Derivation
Stock W	(50%)	Financial	16%p.a.	30%p.a.
Stock X	(30%)	Real Estate	18% p.a.	25%p.a.
Stock Y	(10%)	Hospitality	12% p.a.	15%p.a.
Stock Z	(10%)	Utilities	7% p.a.	5%p.a.

(i) Calculate the expected return of above portfolio. (2 marks)

(ii) Explain the purpose of diversification? Is it possible to diversify away all the risk? (2 marks)

(iii) The expected return of Stock X (18%p.a.) is higher than that of Stock W (16%p.a.), while the Standard deviation of Stock X (25%p.a.) is less than that of Stock W (30%p.a.). Does it necessarily violate the risk-return tradeoff principle? Justify your answer. (4 marks)

(iv) Should the portfolio standard derivation be higher than, equal to or lower than 24.5%p.a.? Justify your answer with appropriate assumptions. (5 marks)