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A portfolio manager is considering the benefits of increasing her diversification by investing overseas. She can...

A portfolio manager is considering the benefits of increasing her diversification by investing overseas. She can purchase shares in individual country funds with the following characteristics.

   NZ Australia Japan

Expected return (%)    10    12 15

Standard deviation of return (%)    8 10 12.5

Correlation with NZ 1.0    0.6    0.4
(a) What is the expected return and standard deviation of return of a portfolio with 20% invested in Japan and 80% in New Zealand?

(b) In the context of international portfolio diversification, explain the concept of the investment hurdle rate.

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