nt opportunities to choose from, bond B and stock S. They have the Assume that you have two following expected returns and variance for the next year: E(m) 0.04 496, Var(r)s : 0.0036, E(r's)s 0.10 1096 Var(r's)s -0.0100 The correlation between the returns of the bond and the stock is Corr(r,rs) 0.20. Warm up a) Calculate the standard deviation of bond returns and stock returns. b) Assuming a risk-free rate ofr 0.02- 2%, find the Sharpe ratio of each investment. Problem 1. We want to study the effects of diversification on expected returns. Instead of holding only bond B or stock S, we put a fraction wag of our money into bond B, and the rest w, 1-W into stock S. To find out how good a combination of Wa and ws diversifies our investment, we create a table and calculate the results. Remember: for a portfolio P. WB E(rP) Ws Sharpe ratio 1.0 0.0 0.8 0.2 0.6 0.4 0.4 0.6 0.2 0.8 0.0 1.0