Information on stocks G & H which have a correlation coefficient of 0.5 appear below:

	Stock G	Stock H
Expected Return	45%	35%
Standard Deviation	0.3	0.2

Your uncle has savings of $20,000 and was thinking of investing 80% of this amount in stock G and the remainder in stock H.

Required:

Calculate the expected return and standard deviation of your uncles portfolio. (5 marks)

Demonstrate by appropriate calculations whether or not diversification has been achieved by combining these two stocks in a portfolio (4 marks)

Your uncle is worried about taking risks as he is close to retirement age. Advise him on what actions he could take to establish a portfolio that is less risky. Provide calculations to show that the proposed portfolio is less risky. (5 marks)