A US based MNC plans to invest in a new project EITHER in US or in Mexico. The new project is expected to take up a quarter of the firm’s total investment fund. The balance of the corporation’s investment is exclusively in an existing US project. The features of the proposed new project are as follows:

                                                          Existing US project   US project (new)   Mexico project (new)

Expected rate of return E(R)                10%                              15%                          15%

Standard deviation of E(R)                0.10                                  0.11                          0.12

Correlation of returns from new

project with returns on existing

UK project                                                 -                                     0.95                        - 0.05

Based on considerations of risk and return, determine the portfolio the MNC should choose if the goal is to generate more stable returns.