3. Portfolio Analysis (3 points)
a) Assume the following about projects A and B; E[ra]=0.1,01=0.03, E[ro] =0.08, 08 = 0.02. Which one has lower absolute risk, and which one has lower relative risk?
b) Find the mean return, Tp, and the standard deviation, Op, of a portfolio consisting of 70% of your money invested in project A (WA=0.70), and 30% of your total wealth invested in project B (W-0.30). The correlation between A and B (N) is 0.25.
c) Now assume that the correlation (PA) is -0.5. Calculate the new standard deviation of this business portfolio. Explain how the riskiness of the portfolio changes.
