Question 1 An Australian portfolio manager is considering increasing the diversification of her portfolio by investing in foreign mutual funds from Canada and Portugal with the following features:...

Extracted text: Question 1 An Australian portfolio manager is considering increasing the diversification of her portfolio by investing in foreign mutual funds from Canada and Portugal with the following features: Australia Canada Portugal Expected return 14% 11% 7% Standard deviation 10% 9% 6% Correlation with 1.0 0.40 0.05 Australia a) Compute the expected return and standard deviation of the following portfolios: Portfolio A: 25 per cent Canada, 75 per cent Australia Portfolio B: 25 per cent Portugal, 75 per cent Australia Portfolio C: 50 per cent Canada, 50 per cent Australian Portfolio D: 50 per cent Portugal, 50 per cent Australia Portfolio E: 75 per cent Canada, 25 per cent Australia Portfolio F: 75 per cent Portugal, 25 per cent Australia b) Based on the above data above, which country seems to offer the best diversification potential for Australian investors? c) If you were risk averse, which foreign mutual fund would you add to your Australian portfolio? What percentage of your funds would be invested in that foreign fund? Assume that you own a portfolio similar to the Australian fund shown above.