Question2[4marks]Janehasbeeno¤eredachoicebetweentwoportfoliosofnancialassets.Eachportfolioismadeupofsharesinonlytwocompanies.The rstportfolioconsistsofsharesincompanyAandcompanyB,bothweightedequally.ThesecondportfolioconsistsofsharesincompanyCandcompanyD,bothweightedequally.Janeistoldthattheexpectedvalueofthereturnsofthetwoportfoliosisexactlythesame.Sothechoicebetweenthetwoportfolioswilldependsolelyuponwhetheroneismoreriskythantheother.JanehasbeentoldthatthevarianceofreturnsforcompanyAisthesameasthatforcompanyCandthatthevarianceofreturnsforcompanyBisthesameasthatforcompanyD.JanehasalsobeentoldthatreturnsforcompanyAandforcompanyBareperfectlyandnegativelycorrelated(AB=1inthiscase)whilethereturnsforcompanyCandforcompanyDareperfectlyandpositivelycorrelated(CD=1inthiscase).IfJaneisriskaverse(ie,preferslessrisktomorerisk),isitpossibletotellwhichportfoliowillshechoose?Whyorwhynot?Question3[1+1+2+2=6marks]Onegeneralbeliefheldbyobserversofthebusinessnanceworldisthattallermenearnmoremoneythanshortermen.InastudyreportedintheWallStreetJournalpublishedon18March20122,30MasterofFinancegraduatesweresurveyedandaskedtoreporttheirannualincomes(indollars)andtheirheights(incentimetres).ThisinformationisrecordedintheEViewswork leearn_more.wf1.