Suppose the expected returns of stock X and Y are 25% and 35% respectively and the standard deviation of stocks X and Y are 0.3 and 0.4 respectively. If you were to create a portfolio consisting of 20% X and 80% Y:

i) Calculate the expected return and standard deviation when the correlation coefficient between the stocks is 0.5 (4 marks)

ii) Calculate the standard deviation when the correlation coefficient between the stocks is -0.5 (3 marks)

iii) Demonstrate by appropriate calculations whether or not diversification has been achieved (4 marks)

iv) Based on parts i) and ii) above how does the correlation coefficient affect the standard deviation of the portfolio (4 marks)