Year $201020112012201320142015$

Stock A $-9\%8\%9\%-2\%3\%10\%$

Stock B $28\%4\%9\%-3\%-9\%15\%$

Consider a portfolio that maintains a $40\%$ weight on stock A and a $60\%$ weight on stock $B.$

a$.$ What is the return each year of this portfolio? $($Round to $2$ decimal places.$)$

b$.$ Based on your results from part $($a$),$ compute the average return and volatiity of the portfolio.

The avg return of the portiolio is$\%.($Round to $2$ decimal places.$)$

The volatility of the portfolio is$\%.($Round to $2$ decimal places.$)$

c$.$ Show that $($i$)$ the average return of the portfolio is equal to the $($weighted$)$ average of the average returns of the two stocks, and $($ii$)$ the volatility of the portiolio equals the same result as from the calculation in Eq$.11\mathrm{.}9.$

The avg annual return for stock $A$ is$\%.($Round to $2$ decimal places.$)$

The average annual return for stock $B$ is$\%.($Round to $2$ decimal places.$)$

The $($weighted$)$ average of the average returns of the two stocks is

$\%.($Round to two decimal places.$)$

The volatility of the portiolio is$\%.($Round to two decimal places.$)$

d$.$ Explain why the portiolio has a lower volatlity than the average volatily of the two stocks. $($Select from the drop$-$down menu.$)$

The portfolio has a $\_\_\_\_\_\_$ volatility than the average volatility of the two stocks because some of the idiosyncratic risk of the stocks in the portfolio is diversified away.