Risk and return You are considering an investment in the stock market and have identified two potential stocks, they are Rio Tinto (NYSE: RIO) and Amazon (NASDAQ: AMZN). The historical prices for the past 10 years are shown in the table below.

1. Which stocks would you prefer to own? Would everyone make the same choice? Explain your answer(s) and show working.

2. Calculate the correlation coefficient between the two stocks. Does it appear that a portfolio consisting of RIO and AMZN would provide good diversification? Explain your answer(s) and show working.

3. Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 80% in AMZN and 20% in RIO. Show working.

Year 2010 2011 2012 2013 Rio Tinto 48.51 69.48 60.46 56.47 53.15 44.13 24.65 44.79 56.11 Amazon 125.41 169.64 194.44 264.27 358.69 354.53 587.00 823.48 1450.89 2015 2016 2017 2018