xx. ) Rainbow Inc. raised 2 billion baht from Thai individuals to invest in Thai equities.

The company’s
board approved the list of four stocks for its fund manager to have in the portfolios. With limited
resources, the fund manager will be allowed to choose either portfolio 1 or portfolio 2. Each portfolio
will have two stocks, which will be equally invested from the 2 billion baht fund. The following
information is the expected return, standard deviation and correlation coefficient of each stock. Please
calculate the expected return and standard deviation of both portfolios. Which portfolio should Rainbow
select for its lowest risk?

Portfolio 1 Portfolio 2
A B C D

Expected Return (%) 30 15 20 10

Standard Deviation (%) 40 20 25 15

The correlation coefficient between stock A and stock B is 1.5, while the correlation coefficient between
stock C and D is 1. (8 points)