Stocks A and B have the following historical returns:

a. Calculate the average rate of return for each stock during the period 2016 through 2020. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would the realized rate of return on the portfolio have been in each year from 2016 through 2020? What would the average return on the portfolio have been during that period?

b. Calculate the standard deviation of returns for each stock and for the portfolio.

c. Assume the risk-free rate during this time was 3.5%. What are the Sharpe ratios for Stocks A and B and the portfolio over this time period using their average returns?

d. Looking at the annual returns on the two stocks, would you guess that the correlation coefficient between the two stocks is closer to 10.8 or to 20.8?

e. If more randomly selected stocks had been included in the portfolio, which of the following is the most accurate statement of what would have happened to σ_p?

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Year 2016 2017 2018 2019 2020 Stock A's Returns, r (24.25%) 18.50 38.67 14.33 39.13 Stock B's Returns, rg 5.50% 26.73 48.25 (4.50) 43.86