In: Finance
(Computingthe standard deviation for a portfolio of two risky investments)Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school. Specifically,she is evaluating an investment in a portfolio comprised of two firms'common stock. She has collected the following information about the common stock of Firm A and Firm B:
Expected Return |
Standard Deviation |
|
Firm A's Common Stock |
0.17 |
0.16 |
Firm B's Common Stock |
0.18 |
0.25 |
Correlation Coefficient |
0.4 |
a. If Mary invests half her money in each of the two common stocks,what is the portfolio'sexpected rate of return and standard deviation in portfolio return?
b. Answer part a where the correlation between the two common stock investments is equal to zero.
c. Answer part a where the correlation between the two common stock investments is equal to +1.
d. Answer part a where the correlation between the two common stock investments is equal to −1.
e. Using your responses to questionsa—d,describe the relationship between the correlation and the risk and return of the portfolio.