Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school. Specifi- cally, she is evaluating an investment in a portfolio comprised of two firms common stock. She has collected the following information about the common stock of Firm A and Firm B:

a) If Mary invests half her money in each of the two common stocks, what is the portfolios expected rate of return and standard deviation in portfolio return?

b) Answer part a where the correlation between the two common stock investments is equal to zero.

c) Answer part a where the correlation between the two common stock investments is equal to 11.

d) Answer part a where the correlation between the two common stock investments is equal to 21.

e) Using your responses to parts ad, describe the relationship between correlation and the risk and return of the portfolio.

\begin{tabular}{lcc} \hline & Expected Return & Standard Deviation \\ \hline Firm A's common stock & 0.15 & 0.20 \\ Firm B's common stock & 0.18 & 0.24 \\ Correlation coefficient & 0.60 & \\ \hline \end{tabular}