Mary Guilott recently graduated from college and is evaluating an investment in two companies' common stock. She has collected the following information about the common stock of Firm A and Firm B: CHART BELOW
.a. If Mary decides to invest 10 percent of her money in Firm A's common stock and 90 percent in Firm B's common stock, what is the expected rate of return and the standard deviation of the portfolio return?
b. If Mary decides to invest 90 percent of her money in Firm A's common stock and 10 percent in Firm B's common stock, what is the expected rate of return and the standard deviation of the portfolio return?
c. Recompute your responses to both questions a and b, where the correlation between the two firms' stock returns is −0.30.
d. Summarize what your analysis tells you about portfolio risk when combining risky assets in a portfolio.
a. If Mary decides to invest 10% of her money in Firm A's common stock and 90% in Firm B's common stock and the correlation coefficient between the two stocks is 0.30, then the expected rate of return in the portfolio is ______%. (Round to two decimal places.)
Expected Returns 
Standard Deviation 

Firm A's common stock 
0.15 
0.12 

Firm B's common stock 
0.09 
0.08 

Correlation coefficient 
.30 
a)
1.
=10%*0.15+90%*0.09=9.60%
2.
=SQRT((10%*0.12)^2+(90%*0.08)^2+2*10%*0.12*90%*0.08*0.3)=7.64617551459552%
b)
1.
=90%*0.15+10%*0.09=14.40%
2.
=SQRT((90%*0.12)^2+(10%*0.08)^2+2*90%*0.12*10%*0.08*0.3)=11.0663453768622%
c)
a)
1.
=10%*0.15+90%*0.09=9.60%
2.
=SQRT((10%*0.12)^2+(90%*0.08)^2+2*10%*0.12*90%*0.08*(0.3))=6.93512797286395%
b)
1.
=90%*0.15+10%*0.09=14.40%
2.
=SQRT((90%*0.12)^2+(10%*0.08)^2+2*90%*0.12*10%*0.08*(0.3))=10.5875398464421%
d)
Due to diversification, risk reduces
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