Assume that we have 3 Stocks A, B & C.

A

B

C

Expected return

8%

12%

6%

Variance

0.012

0.028

0.009

If the covariance between stock A & B return is equal to 0.009159, stock A & C return is equal to -0.005146 and stock B & C return 0.01572

Required

1-Calculate the Standard Deviation for stock A, B & C. which stock is risky and why?

2-Calculate the correlation between every two stocks. What is the indication of it?

3-Calculate the expected return and expected risk for a portfolio that consists of 30% of stock A and 70% 0f stock B, and a portfolio that consists of 60% of stock A and 40% of stock C.

4-Does the diversification effect work for both portfolios? Why?