A portfolio consists of two stocks: (6 marks)

Stock Expected Return Standard Deviation Weight

Stock 1 10% 15% 0.30

Stock 2 13% 20% ???

The correlation between the two stocks return is 0.50

1. Calculate the expected return and standard deviation of the portfolio.

Expected Return:

Standard Deviation:

2. (i) Briefly explain, in general, when there would be benefits of diversification (for any portfolio of two securities).

(ii) Describe whether the above portfolio would exhibit benefits of diversification (and why). [No calculations are required.]

3. Show your calculations re: whether the above portfolio exhibits benefits of diversification and indicate whether it does/doesnt (and why).