1. Consider a portfolio of two stocks whose statistical parameters are given below. Stock A: Annual mean return = 15%, annual standard deviation of return = 30%. Stock B: = 8%, = 15%. Correlation(A,B) = = 0.3 721 An investor with a buy-and-hold strategy buys a portfolio composed of 60% A and 40% B and holds it for 20 years. Simulate the annual returns on the portfolio.

H A B |D|E F G 1 INVESTING IN A PORTFOLIO OF TWO STOCKS 2 StockA StockB 3 Mean 15% 8% 4 Sigma 30% 15% 5 Correlation 0.31 6 Proportion of A 60% 7 8 Summary of portfolio returns 9 Theoretical Actual 10 Mean 11 Sigma 12 13 Simulated returns Normal deviates 14 Year A B 15 1 16 2