A US based MNC plans to invest in a new project EITHER in US or in Mexico. The new project is expected to take up a quarter of the firm’s total investment fund. The balance of the corporation’s investment is exclusively in an existing US project. The features of the proposed new project are as follows:
Existing US project US project (new) Mexico project (new)
Expected rate of return E(R) 10% 15% 15%
Standard deviation of E(R) 0.10 0.11 0.12
Correlation of returns from new
project with returns on existing
UK project - 0.95 - 0.05
Based on considerations of risk and return, determine the portfolio the MNC should choose if the goal is to generate more stable returns.