Question

​(Computing the standard deviation for a portfolio of two risky​ investments) Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school.​ Specifically, she is evaluating an investment in a portfolio comprised of two​ firms' common stock. She has collected the following information about the common stock of Firm A and Firm B:

   Expected Return: Standard Deviation:

Firm A's Common Stock    0.16 0.19

Firm B's Common Stock    0.17 0.22

Correlation Coefficient 0.50

a. If Mary invests half her money in each of the two common​ stocks, what is the​ portfolio's expected rate of return and standard deviation in portfolio​ return?

b. Answer part a where the correlation between the two common stock investments is equal to zero.

c. Answer part a where the correlation between the two common stock investments is equal to plus +1.

d. Answer part a where the correlation between the two common stock investments is equal to minus −1.

Answer 1

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