The realized returns for stock A and stock B from 20042009 are provided in the table below

Year	2004	2005	2006	2007	2008	2009
Stock A	9%	21%	6%	4%	3%	10%
Stock B	19%	5%	28%	5%	10%	23%

(a)

Calculate the expected returns (as percents) over the next year for the stocks assuming the average annual realized returns and past volatility from 20042009 are unbiased estimators of expected returns and future volatility.

stock A %stock B %

Calculate the volatilities (as percents) for returns over the next year for the stocks. (Round your answers to two decimal places.)

stock A %stock B %

(b)

Calculate the expected return and volatility (as percents) of an equally-weighted portfolio. The correlation between the returns of the two stocks is 6.27%. (Round your answer for volatility to two decimal places.)

expected return %volatility %

(c)

Explain why the portfolio has a lower volatility than the average volatility of the two stocks.

The correlation of 6.27% is low, so most of factors that affect the returns of one stock have ---Select--- no impact a large impact on the returns of the other asset. Consequently, the risk is ---Select--- lower higher when they are combined in a portfolio.