P$8-17$ Portfolio return and standard deviation David Choo is thinking of building an in$-$

vestment portfolio containing two stocks$-$H and $G.$ He has assigned $40\%$ of his

portfolio to stock $H$ and the remaining $60\%$ to stock $G.$ David has decided to ana$-$

lyze some historical returns to get a sense for his portfolio's possible future risk and

return. Six years of historical annual returns for each stock are shown in the follow$-$

ing table.

a$.$ Calculate the actual portfolio return, $r_p,$ for each of the six years assuming the

portfolio weights remain same.

b$.$ Calculate the average return for each stock and the portfolio over the six$-$year

period.

c$.$ Calculate the standard deviation of annual returns for each stock and the portfo$-$

lio. How does the portfolio standard deviation compare to the standard devia$-$

tion of the individual stocks?

d$.$ Calculate the correlation coefficient for the two stocks. How would you charac$-$

terize the correlation of returns of the two stocks?

e$.$ Discuss any likely benefits of diversification achieved by David through creation

of the portfolio.