Question

A person is interested in constructing a portfolio. Two stocks are being considered. Let x = percent return for an investment in stock 1, and y = percent return for an investment in stock 2. The expected return and variance for stock 1 are E(x) = 8.55% and  Var(x) = 25. The expected return and variance for stock 2 are E(y) = 3.40% and Var(y) = 1. The covariance between the returns is σ_xy = −3.

(a)

What is the standard deviation (as a percent) for an investment in stock 1?

%

What is the standard deviation (as a percent) for an investment in stock 2?

%

Using the standard deviation as a measure of risk, which of these stocks is the riskier investment?

An investment in stock 1  ---Select--- would would not  be risky compared with an investment in stock 2.

(b)

What is the expected return and standard deviation, in dollars, for a person who invests $600 in stock 1?

expected return$ standard deviation$

(c)

What is the expected percent return and standard deviation (as a percent) for a person who constructs a portfolio by investing 50% in each stock? (Round your answer for standard deviation to four decimal places.)

expected return %standard deviation %

(d)

What is the expected percent return and standard deviation for a person who constructs a portfolio by investing 70% in stock 1 and 30% in stock 2? (Round your answer for standard deviation to four decimal places.)

expected return %standard deviation %

(e)

Compute the correlation coefficient for x and y.

Comment on the relationship between the returns for the two stocks.

There is  ---strong positive or a strong negative or not a --- relationship between the variables.

Answer 1