James Bond has invested 60% of his money in stock A and the 40% in stock B. He accesses their prospects as follows:

	A	B
Expected return (%)	15	20
Standard deviations (%)	20	22
Beta	1.5	1.1
Correlation between returns	0.5

1. What are the expected return of his portfolio?

2. What is the standard deviation of his portfolio?

3. Is Mr. Bond better or worse off investing in the portfolio than investing entirely in share A, or is it not possible to say? Explain your answer. (hint: an average investor prefers higher expected return and lower risk)

4. What is the portfolio beta?

5. If the risk-free rate is 3% and the expected return of the market portfolio is 8%, what is the expected return of Mr. Bond's portfolio according to CAPM?

6. If a new investor want to invest in one and ONLY one stock, which one of A or B is a riskier investment for her and why?

7. If an investor has a well-diversified portfolio of 50 stocks and she is considering adding EITHER Stock A or Stock B to that portfolio, which one is a riskier addition and why?