24. Diversification. Go to our Online Learning Center at www.mhhe.com/bmme, and link to the material for Chapter 11, where you will find a spreadsheet containing 5 years of monthly rates of return on Shell Oil, BP (British Petroleum), and Wal-Mart. (LO3)

a. What was the average return and standard deviation of returns for each firm?

b. What was the correlation of returns between each pair of firms? Try using Excel's CORREL function, which calculates the correlation between two series of numbers. Which pair of firms exhibits the highest correlation of returns? Is this surprising?

c. Now imagine that you held an equally weighted portfolio of Shell and Wal-Mart (that is, a portfolio with equal dollar investments in each stock). Compute the portfolio's rate of return for each month, and calculate the standard deviation of the portfolio's monthly rate of return. How does the portfolio standard deviation compare to the average of the standard deviations of each component stock?

d. Repeat part (c), but this time calculate the results for a portfolio of Shell and BP. Comparing your answers to

(c) and (d), which pair of firms provides greater benefits from diversifica- tion? Relate your answer to the correlation coefficients you found in part (a).