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) = 8.45% and Var(x) 25. The expected return and variance for stock 2 are E(y) = 3.20% and Var(y) = 1. The covariance between the returns is σxy = - 3.

a. What is the standard deviation for an investment in stock 1 and for an investment in stock 2? Using the standard deviation as a measure of risk, which of these stocks is the riskier investment?

b. What is the expected return and standard deviation, in dollars, for a person who invests $500 in stock 1?

c. What is the expected percent return and standard deviation for a person who constructs a portfolio by investing 50% in each stock?

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?

e. Compute the correlation coefficient for x and y and comment on the relationship between the returns for the two stocks?