Heathcliff has invested 40% of his wealth in stock A and the remainder in stock B. He has

assessed their prospects as follows;

A (15% expected return & 20% Standard deviation)

B (20% expected return & 22% Standard deviation)

The correlation coefficient for these two stocks is ?AB= 0.50.

1. Calculate the expected return (ER) and risk (?) of his portfolio.

2. Is his portfolio better or worse than investing entirely in stock A? Why?

3. If the correlation coefficient of stock A with the market (?Am) is 0.88 and ?m is 12%, calculate

the beta coefficient for stock A