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Consider the following four index funds: 5. Fund A Fund B Fund C Fund D Exp. Return (%) 15 11 16 14 Std. Dev. (% 25 22 25 22Investment Theory

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Answer #1

Answer to a.

Based on Mean return: Other things remaining the same, fund with the highest Mean return should be chosen. Hence, Fund C shall be chosen based on Mean return.

Based on Volatility: Other things remaining the same, fund with the lowest volatility should be chosen. Hence, Fund B or D shall be chosen. However, between these two, Fund D has higher Mean return and hence Fund D shall be chosen.

Answer to b.

Fund B has the least correlation to the current portfolio, and hence she shall invest in Fund B.

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