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You have invested $90,000 in a share portfolio that has a return of 11.5% and a standard deviation of 15%. You are now considering investing $10,000 in a microfinance asset and adding this asset to your portfolio. The microfinance asset has a return of 23.25%, a standard deviation of 32% and the covariance between your share portfolio and the microfinance asset is – 0.10.

a. Calculate the return, variance and standard deviation of the new portfolio. Show all calculations. (Show answer as a percentage, correct to 3 decimal places.)

b. Was it effective adding the microfinance asset to your portfolio? Analyse why the return and risk of the new portfolio have changed and if you have achieved diversification by combining the microfinance asset with your existing share portfolio.


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