Year -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 Stock A 10% 25% -14% -10% -6% 20% 11% 13% 5% -6% Stock B -4% 13% 5% 2% 16% -8% 4% 7% -12% 19% Q1.

a) What are the simple and geometric average returns of both stocks?

b)Which stock is riskier based on the returns in the past 10 years? Use your financial calculator and type in the detailed calculator solutions.

d) What is the portfolio standard deviation if you decide to allocate 30% of your investment in stock A and 70% in stock B, given the correlation between stock A and B is -0.25? (5 Points)

c) You formed a portfolio when you invested in both stocks? What type of risk are you diversifying away? Use an example to illustrate this type of risk. (3 Points)