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

16.0%

20.0%

Stock B

12.0%

30.0%

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. You will purchase shares of company A for $750 000 and shares of B for $250 000.

b. It is estimated that the correlation between the stock returns is -0.20. Explain, what does this result mean?

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

(Show your work, you may upload the solution file)