The data below are annual total returns for General Foods (GF) and Sigma Technology (ST) for the period 19972011. Sigma Technology is highly regarded by many investors for its innovative products. It had returns more than twice as large as that of General Foods. What would have been the results if an investor had placed half her funds in General Foods and half in Sigma Technology during this 15-year period in order to try to earn a larger return than that available in General Foods alone? Would the risk have been too large?

Calculate the arithmetic mean returns for each stock.

Calculate the standard deviation for each stock using the STDEV function in the spreadsheet.

Calculate the correlation coefficient using the CORREL function in the spreadsheet.

Calculate the covariance using the COVAR function in the spreadsheet.

Calculate the portfolio return assuming equal weights for each stock.

Set up a calculation for the standard deviation of the portfolio that will allow you to substitute different values for the correlation coefficient or the standard deviations of the stocks. Using equal weights for the two stocks, calculate the standard deviation of the portfolio consisting of equal parts of the two stocks.

How does the portfolio return compare to the return on General Foods alone? How does the risk of the portfolio compare to the risk of having held General Foods alone?

Assume that the correlation between the two stocks had been 0.10. How much would portfolio risk have changed relative to the result calculated in f?