Stock X has an expected return of 8% and Stock Z has an expected return of 12%. The standard deviation of the expected return is 10% for both stocks. Assume that these are the only two stocks available in a hypothetical world.

A) If the correlation between the returns of the two stocks is +1:

-What is the expected return and standard deviation of a portfolio containing 50% X and 50% Z?

-Does this portfolio offer any benefits of diversification (if the correlation is +1)? How do you know?

-Will any investor include Stock X in his or her portfolio? Explain why or why not.

B) If the correlation between the returns of the two stocks is +0.3:

-What is the expected return and standard deviation of a portfolio containing 50% X and 50% Z?

-Does this portfolio offer any benefits of diversification (if the correlation is +0.3)? How do you know?

-Will any investor include Stock X in his or her portfolio (if the correlation is +0.3)? Explain why or why not.

C) Can diversification offer benefits to investors if the correlation between stocks is positive?