In this question you will be calculating two stock portfolio (AAPL and AMZN) and (AAPL and CAT) weighted annual returns. Weights are: 100%, 90%, 80%, 70%, 60%, 50%, 40%, 30%, 20% , 10% and 0%.

Calculate weighted (expected) returns for the two stock portfolios: (AAPL and AMZN) and (AAPL and CAT). For this part, use arithmetic average of annual returns that you calculated in part Q.1.A and weights given as 100% 0%. Then, take the average of weighted returns, this value will be portfolio (AAPL, AMZN) expected return. Repeat same calculation for the portfolio (AAPL, CAT).

Use two stock SD formula to calculate portfolio standard deviation for portfolio (AAPL and AMZN) and (AAPL and CAT). You will use above weights and SD calculated in Q.1.D. Where subscript 1: AAPL and subscript 2: AMZN and 1,2=AAPL,AMZN where stands for correlation i.e. correlation between AAPL and AMZN. [This calculation is based on actual correlation coefficient calculated in Q.1.G.]

Repeat part B to calculate standard deviation (SD) of portfolio for three additional values of correlation coefficient. 1,2=AAPL,AMZN (+1, 0, -1). You will be calculating 11 values of SD for each correlation value i.e +1, 0, -1 and actual correlation calculated in Q.1.G. Where these 11 values are coming from? We used 11 weights 100%, 90%, 80%, 70%, 60%, 50%, 40%, 30%, 20% , 10% and 0%. [you will have 11 values for each correlation coefficient i.e actual value, +1, 0 and -1]

Repeat exactly the same as part B for portfolio (AAPL and CAT)

Plot the Opportunity Set for portfolio (AAPL and AMZN) by taking standard deviation (SD) of portfolio on horizontal axis (calculated in part C) and expected return of portfolio on the vertical axis (calculated in part A) for each degree of correlation i.e. 1,2=AAPL,AMZN (+1, 0, -1 and actual).

Repeat D for the portfolio (AAPL and CAT) using 1,3=AAPL,CAT (+1, 0, -1 and actual)

Interpret the plots in part E and F to discuss diversification benefits (considering different correlation values).

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