1. Here are returns and standard deviations for four investments.

Return Standard Deviation Treasury bills 6 % 0%

Stock P 10 14 Stock Q 14.5 28 Stock R 21 26 Calculate the standard deviations of the following portfolios.

a. 50% in Treasury bills, 50% in stock P.

b. 50% each in Q and R, assuming the shares have • perfect positive correlation • perfect negative correlation • no correlation

c. Plot a figure like Figure 8.3 for Q and R, assuming a correlation coefficient of .5.

d. Stock Q has a lower return than R but a higher standard deviation. Does that mean that Q’s price is too high or that R’s price is too low?