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Question 2 Portfolio theory and investments (12 marks) Jane is 27 years old and has just inherited HKD 500,000 from a rich relative. Since she has no experience in investments, she asked for advice from her friend Gordon. Being a conservative investor, Gordon recommended her to invest 50% of the money in government bonds and the remaining portion in some funds. After some research, he came up with the following estimates Expected Standard Correlation with | dev return (%pa.) 3.80% 10.10% 8.40% ation Government bonds 3.40% 14.50% 11 .00% Government Bonds Global Equity Fund A Commodities Fund B 0.50 0.25 i. (2 marks) Calculate the expected return and standard deviation of a portfolio with half the money in the government bonds and the other half in Fund A. ii. (2 marks) Repeat the calculation in (i) by replacing Fund A with Fund B. ii. (5 marks) Which combination is a better choice? Distinguish between the choice that Jane would make according to the type of investor that she belongs to: risk averse, risk neutral or risk seeking iv. (3 marks) Jane intended to choose Fund B as it seems to have a lower risk. Another friend, Peter, boasting his knowledge of "theory of investment", claims that Lower risk/higher return are achievable by adding some high rishK investments to the portfolio.'" Is this statement correct? Give brief reasons to support your answer Question 2 Portfolio theory and investments (12 marks) Jane is 27 years old and has just inherited HKD 500,000 from a rich relative. Since she has no experience in investments, she asked for advice from her friend Gordon. Being a conservative investor, Gordon recommended her to invest 50% of the money in government bonds and the remaining portion in some funds. After some research, he came up with the following estimates Expected Standard Correlation with | dev return (%pa.) 3.80% 10.10% 8.40% ation Government bonds 3.40% 14.50% 11 .00% Government Bonds Global Equity Fund A Commodities Fund B 0.50 0.25 i. (2 marks) Calculate the expected return and standard deviation of a portfolio with half the money in the government bonds and the other half in Fund A. ii. (2 marks) Repeat the calculation in (i) by replacing Fund A with Fund B. ii. (5 marks) Which combination is a better choice? Distinguish between the choice that Jane would make according to the type of investor that she belongs to: risk averse, risk neutral or risk seeking iv. (3 marks) Jane intended to choose Fund B as it seems to have a lower risk. Another friend, Peter, boasting his knowledge of "theory of investment", claims that Lower risk/higher return are achievable by adding some high rishK investments to the portfolio.'" Is this statement correct? Give brief reasons to support your

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