1. Marco Wiz has 40% of his money invested in stock A and the remaining 60% in stock B. Stock As expected return is 5% with a volatility of 4.1%, stock Bs expected return is 2.5% with a volatility of 1.5%. The correlation between the returns of stock A and B is 0.3.

Find the expected return, variance and volatility of Marcos portfolio.

Quantify the diversification benefit in Marcos portfolio. By how much does diversification reduce the risk of his portfolio?

Explain the concept of diversification between investments in your own words. Under what condition is diversification at work between two different stocks? Is this condition realistic in practice?