Homework:Unit 8 Lab Assignment

Question 20, P8-3 (similar to)

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(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:

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.

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

+1.

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

1.

e. Using your responses to questions

ad,

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

Expected Return		Standard Deviation
Firm A's common stock	0.14	0.19
Firm B's common stock	0.19	0.25
Correlation coefficient	0.70