Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings

Question:

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 …………………. 0.15 ……………… 0.20

Firm B’s common stock …………………. 0.18 ……………… 0.24

Correlation coefficient …………………… 0.60

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 11.

d. Answer part a where the correlation between the two common stock investments is equal to 21.

e. Using your responses to parts a-d, describe the relationship between correlation and the risk and return of the portfolio.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...