Assume that you are a wealthy investor with your entire portfolio invested in stocks. Your financial adviser has suggested that you buy some fine art to balance the portfolio and based this suggestion on the low correlation between returns on stocks and returns on fine art (.10).

a. If the standard deviation of stock returns is 20% and the standard deviation in fine art returns is 15%, estimate what the standard deviation of your portfolio would be if you invested 10% of your portfolio in fine art.

b. If the expected return on stocks is 12.5% and the expected return on fine art is only 5%, would you add fine art to your portfolio? Explain why or why not. (The risk-free rate is 6%.)