Question 3

Using the formula for a 2-asset stock portfolio calculate the standard deviation and expected return for stock A and stock B if you invest 50% in each stock. How does it compare to the average (simple) risk and return for each stock? Explain the differences if any.

Stock A: Expected return = 12%, standard deviation = 20%

Stock B: Expected return = 8%, standard deviation = 15%

Correlation between two stocks = -0.4