Buckeye Systems and Manzanita stocks both have a volatility of 35%. Buckeye Systems has an expected return of 10%, and Manzanita has an expected return of 12%. You form a portfolio with 50% invested in each stock.

1. Compute the expected return of the portfolio. Show your steps.
2. Compute the volatility of the portfolio if the correlation between the two stocks is (a) +1.00, (b) 0.50, (c) 0.00, (d) -0.50. and (e) -1.00. Show your steps.
3. In which of the five cases described in part b) is the volatility lower than that of the original stocks?
4. Is the following statement true, false, or uncertain? The volatility of a portfolio consisting of Buckeye and Manzanita will be lower than the volatility of the original stocks as long as the correlation between the stocks is less than +1.00. Why? Explain your answer.