Determine the expected return and risk of a portfolio made up of 70 per cent of security X and 30 per cent of security Y if the correlation coefficient for the returns on X and Y is +0.2 Security Expected Return Standard Deviation of Return

X 12 per cent 15 per cent

Y 18 per cent 22 per cent

ii. Explain briefly why the risk of the portfolio specified above is below the weighted average of the risk of securities of X and Y.

b) Explain how increasing the number of securities in a portfolio is likely to reduce the risk of the portfolio but it is unlikely to eliminate all of the risk.