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​(Computing the standard deviation for a portfolio of two risky​ investments) Mary Guilott recently graduated from...

​(Computing the 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      0.17

Firm B's Common Stock 0.19      0.24

Correlation Coefficient   0.40     

.

a. If Mary invests half her money in each of the two common​ stocks, what is the​ portfolio's expected 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

plus+1.

d. Answer part a where the correlation between the two common stock investments is equal to

minus−1.

e. Using your responses to questions

along dash—d​,

describe the relationship between the correlation and the risk and return of the portfolio.

Solutions

Expert Solution

jeff jeffy answered 1 year ago
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