Ebenezer Scrooge has invested 60% of his money in share A and the remainder in share B.

He assesses their prospects as follows:

A B Expected return (%) 15 20 Standard deviation (%) 20 22 Correlation between returns .5

a. What are the expected return and standard deviation of returns on his portfolio?

b. How would your answer change if the correlation coefficient were 0 or  .5?

c. Is Mr. Scrooge’s portfolio better or worse than one invested entirely in share A, or is it not possible to say?

AppendixLO1