Part 2 (20 marks) Risk and return You are considering an investment in the stock market and have identified two potential stocks, they are Rio Tinto (NYSE: RIO) and Amazon (NASDAQ: AMZN). The year-end historical prices for the years 2010 to 2018 are shown in the table below. Year Rio Tinto Amazon 2010 48.51 125.41 69.48 2011 169.64 2012 60.46 194.44 264.27 2013 56.47 358.69 2014 53.15 2015 44.13 354.53 2016 24.65 587.00 2017 44.79 823.48 2018 56.11 1450.89 1. (5 marks) Which stocks would you prefer to own? Would every rational investor make the same choice? Explain your answer(s). 2. (8 marks) Calculate the covariance and correlation coefficient between the two stocks. Does it appear that a portfolio consisting of RIO and AMZN would provide good diversification? Explain your answer(s). 3. (7 marks) Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 70% in AMZN and 30% in RIO