Suppose that we have two stocks 1 and 2 with the following characteristics: E[R₁] = 10%, s₁=10%, E[R₂] =20%, s2=30%, the correlation between stock 1 and 2 is 0.5. The risk-free return of 5% is available in T-bills. A customer walks into our brokerage firm with all of his $10,000 net worth invested in stock 1.

(a)Is there any portfolio that can be constructed with stocks 1, 2, and risk-free security that will make him better off? What is it? Assume that no short-selling of stocks is allowed. You do not need to find the best portfolio, just a better portfolio. Explain why your portfolio is strictly better than stock 1 alone.

(b)Based on your answer in part a), you advised the customer that there is a better portfolio to invest in. He then looks at you straight in the eye and asks you, Can you guarantee that I will not regret following your advice one year from now? Can you assure him No regrets, guaranteed? Why or why not? Explain in words.