You have just inherited DKK 100,000 which you are going to invest in stocks. You are considering two stocks, X and Y. The two stocks have the following returns in good and bad times:

a. What is the expected return and standard deviation for stocks X and Y?

You consider buying both stock X and Y. What is the expected return and standard deviation of your portfolio if you:

b. Invest DKK 3,000 in stock X and DKK 7,000 in stock Y?

c. Invest DKK 5,000 in stock X and DKK 5,000 in stock Y?

d. Invest DKK 7,000 in stock X and DKK 3,000 in stock Y?

e. Invest DKK 9,000 in stock X and DKK 1,000 in stock Y?

You realize that the four portfolios above have different standard deviations.

f. Explain intuitively why this is the case (1 to 10 sentences).

g. Which of the four portfolios would you choose to invest in?

Return in good times 0% 15% Return in bad times 1 0% 5% Stock X Stock Y