You have gathered information about the expected returns and standard deviations of two stocks, which is given in the table below:

Expected return

Standard deviation

Stock A

15.0%

30.0%

Stock B

10.0%

40.0%

a.Discuss which stock is more attractive and why? (hint: think about the assumptions first)

You are going to form a portfolio, which includes these two stocks. The value of your total portfolio is 500 000 and investment into stock B is 30% of the total portfolio.

b.It is estimated that the correlation between the stock returns is 0.22. Explain, what does this result mean?

c.Calculate the portfolio risk and expected return, and explain the benefits of diversification.