You are given the following information: Expected return on stock A ........................................12% Expected return on stock B

Question:

You are given the following information:

Expected return on stock A ........................................12%

Expected return on stock B ........................................20%

Standard deviation of returns:

Stock A ................................................................1.0

Stock B ................................................................6.0

Correlation coefficient of the returns on stocks A and B ......+.2

a) What are the expected returns and standard deviations of a portfolio consisting of?

1. 100 percent in stock A

2. 100 percent in stock B

3. 50 percent in each stock

4. 25 percent in stock A and 75 percent in stock B

5. 75 percent in stock A and 25 percent in stock B

b) Compare the above returns and the risk associated with each portfolio.

c) Redo the calculations assuming that the correlation coefficient of the returns on the two stocks is 20.6. What is the impact of this difference in the correlation coefficient?

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