6. You would like to form a portfolio of two stocks (A and B). The holding period returns (HPR) of the two stocks over the past ten years are given in the following table: Year A B 2013 -3.00% 2014 1.20% 2015 8.00% 2016 -5.00 % N1553 3.00% 2.80% 4.00% -8.00% 2017 -2.00% -3.00% 2018 6.00% 0.00% 2019 12.00% 3.00% 2020 8.00% 4.00% 2021 4.00% -1.00% 2022 -2.00% 3.00% (a) Estimate the expected returns and the standard deviations of the two stocks. Also estimate the correlation between the two stocks. Compare your estimates to average historical values observed in the US or UK equity (stock) market. [10 marks] (b) Calculate the expected return and standard deviation of i) an equally-weighted portfolio and ii) a portfolio consisting of 5% investment in stock A. Discuss the standard deviation of portfolio ii) by comparing it to investing in stock B only. Page 3 of 5 [ 5 marks] /Turn over Theory of Investments (c) Assume that a risk-free asset with a return of 0.5% is traded in the market in addition to the two stocks A and B. If you want to combine either stock A or stock B with the risk-free asset, which one should you choose and why? [ 5 marks]