Shirley Johnson, portfolio manager, has asked you to analyze a newly acquired portfolio to determine its mean value and variability. The portfolio consists of 50 shares of Xylophone Music and 40 shares of Yankee Workshop. Analysis of past history indicates that the share price of Xylophone Music has a mean of 25 and a variance of 121. A similar analysis indicates that Yankee has a mean share price of 40 with a variance of 225. Your best evidence indicates that the share prices have a correlation of + 0.5.
a. Compute the mean and variance of the portfolio.
b. Suppose that the correlation between share prices was actually -0.5. Now what are the mean and variance of the portfolio?