You just started your internship at Platinum Asset Management. Your mentor provides you with the below information regarding the expected returns (E(R)), standard deviations per annum (SD) and correlation coefficients of four company stocks that he has been following. E(R) SD Company 1 Company 2 Company 3 Company 4 8% 9.60% 5.40% 30% 8% 45% 10% 12% p(1,2) p(1,3) Correlation Coefficient p(1,4) 0.9 p(2,3) p(2.4) 0.64 0(3,4) 0.25 (a) Your mentor asks you to pick two stocks out of the four to construct a portfolio with a view to diversify away firm-specific risks. Which two stocks do you choose? Explain. Hint: no calculation is required to answer this question. (2 marks)

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To construct a diversified portfolio and minimize firmspecific risks its important to select stocks ... View the full answer