Suppose Target’s stock has an expected return of 17% and a volatility of 35%, Hershey’s stock has an expected return of 15% and a volatility of 30%, and these two stocks are uncorrelated.

a. What is the expected return and volatility of an equally weighted portfolio of the two stocks?

Consider a new stock with an expected return of 16% and a volatility of 27%. Suppose this new stock is uncorrelated with Target’s and Hershey’s stock.

b. Is holding this stock alone attractive compared to holding the portfolio in (a)?

c. Can you improve upon your portfolio in

(a) by adding this new stock to your portfolio?

Explain.

AppendixLO1