(a) WTG is an investment company which invests in 2 shares HIA and TEE. Both are large capitalised firms and
listed in the Tokyo Stock Exchange. Assume that (i) the expected returns on shares of HIA, and TEE are 27%
and 45% respectively. (ii) the standard deviations of the return on shares of HIA and TEE are 19%. and 24%
respectively. and (iii) the covariance between the returns on the two equities is 0.007. The two shares are
equally weighted in WTG’s current portfolio whereas WTG considers reducing the investment in HIA to 20%
and increasing the investment in TEE to 80% in their portfolio. Analyse whether or not such a change makes
sense. (20% of the mark)

(b) Several leading scholars have commented that a reliance on models that fall under the rational
expectation rubric and which are underpinned by ideas on market efficiency led to a deepening of the 2008/9
financial crisis. 00 you agree with this position? Discuss your answer with reference to current academic
debate on the question. (80% of the mark)

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